Question

Notes Receivable. On December 31, 2020 Kaplin Inc. provided service to Sports Unlimited, accepting a six percent, five-year promissory note having a maturity value of $800,000 (interest payable annually on December 31). Kaplyn Inc. pays 7 percent for its borrowed funds. Sports Unlimited, however, because it is considered a higher risk, pays 9 percent for its borrowed funds.

Instructions

a) Prepare the journal entries to record the transaction on the books of Kaplyn Inc. at December 31, 2020. (Assume that the effective interest method is used.)

b) Make all appropriate entries for 2021 on the books of Kaplyn.

Answer 1

Answer :

Calculations for Note Receivable:-

Interest per year = $800,000 * 6%= $48000

Present value of Interest and Maturity amount = $48000 * PVAF 9% 5 years + $800,000 * PVF 9% 5 years

= $48000 * 3.88965 + $800,000 * 0.64993

= $706,647.20

a). Journal entry to record the transaction on Dec 31, 2020.

Account Titles               Debit          Credit
Note Receivable              $706,647.20
  Service Revenue                           $706,647.20
(Entry for accepting Note Receivable)

b). Entry for the year 2021 is as follows:-

Account Titles               Debit          Credit
Cash                         $48,000
Note Receivable              $15,998.25
  Interest Income                           $63,598.25
(Entry for recognising and accepitng Interest income)

Interest Income = $706,647.20 * 9% = $63598.25