Question

Problem # 3 (Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Tran Co. performed environmental consulting services for Hayden Co. Hayden was short of cash, and Tran Co. agreed to accept a $100,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayden is somewhat of a credit risk and typically borrows funds at a rate of 15%. Tran is much more creditworthy and has various lines of credit at 8%.

Instructions

1. Prepare the journal entry to record the transaction of December 31, 2015, for Tran Co.
2. Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2016.
3. Assuming Tran Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2017

Answer 1

Here we need journal entries for 3 situations thsoe are as follows.

Situation 1

December 31 2015 on recipet of note from Hayden co.

December 31 2015

Note receivable a/c.......................Dr $100000

To environmental consulting services a/c $100000

(Being note receivable received from. Hayden co for services rendered)

Situation 2 :-

On December 31 2016

No entry is required because there is no transaction on this date and note receivable does not consists of interest also. So no entry is required on the date of 31 december 2016.

Situation 3 :-

On 31 december 2017 recipiet of note receivable amount from Hayden

If amount paid by hadden co the following entry to be passed.

Cash a/c...................................Dr 100000

To notes recieveable a/c 100000

(Being the amount received from Hayden co.)

If amount not paid by handen co the following entry to be passed :-

Hayden co a/c...........................Dr 100000

To note receivable a/c. 100000

(Being the amount not received from. Hayden co and note receivable is cancelled and Hayden co is treated as debtor)

These are all the information required ti solve the above question .

I hope, all the above mentioned points, information and journal entries are useful and helpful to you.

Thank you.