Question

In: Accounting

On January 1, 2014, Fishbone Corporation sold equipment to Lost Company that cost $250,000 and that...

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.

Solutions

Expert Solution

(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


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