ABC company, sold equipment to D company. ABC agree to provide financing to D, in the form of 100000, with 10% interest bearing note to be repaid in 5 years. market rate is 5%. prepare the ALL journal entries to record the sale of equipment, record interest on note receivable for first 2 years. ITS a long term interest bearing note question at premium.
Solution:
Future value of note after 5 years = $100,000 * (1+0.10)^5 = $161,051
Fair value of equipment = $161,051 * PV factor at 5% for 5th period
= $161,051 * 0. 783526 = $126,188
Journal Entries - ABC Company | |||
Event | Particulars | Debit | Credit |
1 | Note receivables Dr | $126,188.00 | |
To Sales revenue | $126,188.00 | ||
(To record sale of equipment) | |||
2 | Note receivables Dr ($126,188*5%) | $6,309.00 | |
To Interest revenue | $6,309.00 | ||
(To record interest revenue for year 1) | |||
3 | Note receivables Dr [($126,188 + $6,309)*5%] | $6,625.00 | |
To Interest revenue | $6,625.00 | ||
(To record interest revenue for year 2) |
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