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Notes Receivable. On December 31, 2020 Kaplin Inc. provided service to Sports Unlimited, accepting a six...

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.

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Answer #1

a.

Date Account title and explanation Debit Credit
12/31/2020 Notes receivable $800,000
Discount on notes receivable $93,374
Service revenue $706,626
[To record service revenue]

b.

Date Account title and explanation Debit Credit
12/31/2021 Cash [$800,000 x 6%] $48,000
Discount on notes receivable $15,596
Interest revenue [$706,626 x 9%] $63,596
[To record cash received for interest]

Calculations:

Cash interest = $800,000 x 6% = $48,000

Present value of cash interest $186,706
[$48,000 x 3.8897 PV annuity of $1 (9%, 5 yrs)]
Present value of face value of the notes $519,920
[$800,000 x 0.6499 PV of $1 (9%, 5yrs)]
Present value of the notes $706,626
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