Question

On July 1, 2020, Buffalo Inc. made two sales.

1.		It sold land having a fair value of $904,970 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,423,984. The land is carried on Buffalo's books at a cost of $596,000.
2.		It rendered services in exchange for a 3%, 8-year promissory note having a face value of $409,570 (interest payable annually).

Buffalo Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Record the two journal entries that should be recorded by Buffalo Inc. for the sales transactions above that took place on July 1, 2020. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

No.	Date	Account Titles and Explanation	Debit	Credit
1.	July 1, 2020	enter an account title	enter a debit amount	enter a credit amount
		enter an account title	enter a debit amount	enter a credit amount
		enter an account title	enter a debit amount	enter a credit amount
		enter an account title	enter a debit amount	enter a credit amount
2.	July 1, 2020	enter an account title	enter a debit amount	enter a credit amount
		enter an account title	enter a debit amount	enter a credit amount
		enter an account title	enter a debit amount	enter a credit amount

Answer 1

Answer :-

Journal entries to record the transaction are as follows :-

No.	Date	Account Titles and Explanation	Debit	Credit
1	July 1, 2020	Notes Receivable	$1,423,984
		To Discount on Notes Receivable ($1,423,984 - $596,000 - $308,970)		$519,014
		To Land		$596,000
		To Gain on Sale of Land ($904,970 - $596,000)		$308,970
2	July 1, 2020	Notes Receivable	$409,570
		To Discount on Notes Receivable ($409,570 - $226,455)		$183,115
		To Service Revenue (Note - 1)		$226,455

Note 1 :-

Face value of Note = $409,570

Present value of Note = Face value of Note × Present value (n = 8 years , i = 12%)

Present value (n = 8 years , i = 12% ) = 0.40388

Present value of Note = $ 409,570 × 0.40388 = $165,417.1316

Present value of annual interest = Annual Interest × Present value of Annuity ( n = 8 years , i = 12% )

Annual Interest = Face value of Note × Interest rate

Annual Interest = $409,570 × 3% = $12287.1

Present value of Annuity ( n = 8 years , i = 12% ) = 4.96764

Present value of annual interest = $12,287.1 × 4.96764 = $ 61,037.8894

Services revenue = Present value of Note + Present value of Annual interest

Services revenue = $165,417.1316 + $61,037.8894

Services revenue = $226,455