Question

On October 1, 2017, Vaughn Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $138,800, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Vaughn’s financial statements are prepared on a calendar-year basis.

Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Vaughn Equipment Company for the entire term of the note. Assume that reversing entries are not made on January 1, 2018 and January 1, 2019.

Answer 1

Journal entry :

Date	account and explanation	debit	credit
Oct 1,2017	Notes receivable	138800
	Sales revenue		138800
	(To record Sales)
Dec 31,2017	Interest receivable (138800*8%*3/12)	2776
	Interest revenue		2776
	(To record interest)
Oct 1,2018	Cash (138800*8%)	11104
	Interest receivable		2776
	Interest revenue		8328
	(To record interest received)
Dec 31,2018	Interest receivable	2776
	Interest revenue		2776
	(To record interest)
Oct 1,2019	Cash	149904
	Interest receivable		2776
	INterest revenue		8328
	Notes receivable		138800
	(To record amount received)