Question

On December 31, 2015, Sarasota Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Sarasota Co. agreed to accept a $264,600 zero-interest-bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 12%. Sarasota is much more creditworthy and has various lines of credit at 6%.

Prepare the journal entry to record the transaction of December 31, 2015, for the Sarasota Co.

Assuming Sarasota Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

Assuming Sarasota Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

Answer 1

	date	explanation	debit	credit
	dec 31 2015	notes receivables	264600
		discount on notes receivables		53662.5
		service revenue		210937.5
	dec 31 2016	discount on notes receivables	25312.5
		interest revenue		25312.5
	dec 31 2017	discount on notes receivables	28350
		interest revenue		28350
	dec 31 2017	cash	264600
		notes receivables		264600
2015	discount on notes receivables	264600/(1.12)^2	210937.5	264600-210937.5	53662.5
2016	discount on notes receivables	264600/(1.12)^2	210937.5	210937.5*125	25312.5
2017	discount on notes receivables	264600/(1.12)^1	236250	236250*12%	28350