Question

2. On 1/1/2020, Star sold a machine with the following terms to Eagle Inc.: cash received $20,000, $40,000 5% (state rate) note receivable due in 5 years with interest payable 1/1 and 7/1. Eagle’s cost of capital is 6%. The original cost of the machine was $25,000 with an accumulated depreciation of $11,000.

The present value of the note is : ________________________

The entry Star (seller) would record is :

The entry Eagle (buyer) would record is :

Prepare the first 4 periods of the amortization schedule for the note that Eagle (the Buyer) would prepare. You only need to show the first 4 periods. Label the amortization schedule with account names and debits/credits:

Answer 1

Present value of Notes:
Amount of notes receivable after 5 years	40000
Multiply: PVF at 6% for 5 year	0.747258
Present value of notes	29890.32

Journal entry:
S.no.	Accounts title and explanation	Debit $	Credit $
a.	Accumulated depreciation	11000
	Cash	20,000
	Notes receivable	40,000
	Equipment		25,000
	Interest receivable		10110
	Gain on sale of assets (20,000+29890-14000)		35890
	(for sale of equipment)
b.	Equipment	60000
	Cash		20000
	Notes Payable		40000
	(for buying equipment)

Amortization Chart:
Year	Interest revenue Credited	Interest receivable debited	Interest receivable balance	Carrying value of Notes receivable
0			10110	29890
1	1793	1,793	8317	31683.4
2	1901	1,901	6416	33584.4
3	2015	2,015	4401	35599.4
4	2136	2,136	2265	37735.4
5	2265	2,265	0	40000

Please give a thumbs up

Any issues please mention in comment box