Question

On January 1, 2016, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitt's books of $10,000. Chatham gave Pitt a $60,000 non-interest-bearing note payable in five equal annual installments of $12,000 with the first payment due and paid on January 1, 2017. There was no established price for the patent, and the note has no ready market value. The prevailing rate of interest for a note of this type at January 1, 2016, is 12%.

(Click here to access the PV tables to use with this problem.)

Required:

1. Prepare a schedule showing the income or loss before income taxes that Pitt should record for the years ended December 31, 2016 and 2017.

If required, round your answers to the nearest cent.

PITT COMPANY
Income Before Income Taxes on Sales of Patent
For the Years Ended December 31, 2016 and 2017
		2016	2017
	$
		$
			$
Income before income taxes		$	$

2. If Pitt inadvertently failed to discount the note and instead recorded it at its gross value, what would be the effect on income or loss before income taxes for the year ended December 31, 2016?

If required, round your answer to two decimal places.

Income before income taxes would be   by $ for 2016.

Answer 1

1		12% rate	Installment	Amount
	Year 1	0.893	12000	10716
	Year 2	0.797	12000	9564
	year 3	0.712	12000	8544
	Year 4	0.635	12000	7620
	Year 5	0.567	12000	6804
				43248
	Discounted value of notes payable	43248
	Book value of patents	10000
	Profit on sale of patents	33248
2	If not discounted
	Amount received through payable 12000*5	60000
	Book value of patents	10000
	Profit on sale of patents	50000
	Income before income tax would increase by 50,000-33248= $16752