Question

On January 1, 2014, Fishbone Corporation sold equipment to Lost Company that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Fishbone received as consideration a non-interest-bearing note requiring payments of $80,000 annually for 3 years. The first note payment is to be made on January 1, 2014. The prevailing rate of interest for a note of this type on January 1, 2014, was 5%.

Record the 1/1/14 transaction for Fishbone Corporation and all necessary entries from 2014-2016.

Record the 1/1/14 transaction for Lost Company and all necessary entries from 204-2016.

Answer 1

(1)

The journal entries for F Corporation are provided below:

Date	Account tile and explanation	Debit	Credit
Jan1,2014	Notes receivable	228000
	Accumulated depreciation	100000
	Equipment		250000
	Gain on sale of equipment		78000
	( to record sale of equipment in exchange of notes payable)
Jan1,2014	Cash	80000
	Notes receivable		80000
	(to record cash received against notes receivable)
Jan1,2015	Cash	80000
	Notes receivable		72000
	Interest revenue(160000*5%)		8000
	(to record cash received against notes receivable)
Jan1,2016	Cash	80000
	Notes receivable		76000
	Interest revenue(80000*5%)		4000
	(to record cash received against notes receivable)

(2)

The journal entries for L Company are provided below:

Date	Account title and explanation	Debit	Credit
Jan1,2014	Equipment	228000
	Notes payable		228000
	(to record purchase of equipment in exchange of notes payable)
Jan1,2014	Notes payable	80000
	Cash		80000
	(to record cash paid against notes payable)
Jan 1,2015	Interest expenses (160000*5%)	8000
	Notes payable (80000-8000)	72000
	Cash		80000
	(to record cash paid against notes payable)
Jan1,2016	Interest expense (80000*5%)	4000
	Notes payable (80000-4000)	76000
	Cash		80000
	(to record cash paid against notes payable)

The present value of annual payments i.e., the sale price of equipment is calculated below:

Present value = payment on Jan.1,2014 + (annual payment *PVAF_(2YR,5%))

                        = 80000+(80000*1.85) = 80000+148000 = 228000