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In: Accounting

On July 1, 2020, Culver Inc. made two sales. 1. It sold land having a fair...

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

1. It sold land having a fair value of $917,020 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,442,944. The land is carried on Culver's books at a cost of $590,500.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $408,520 (interest payable annually).


Culver 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 Culver 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

Solutions

Expert Solution

Journal Entries:

​​​​​​

Working note Date Title and explanation Debit ($) Credit ($)
Working note 1 1 july, 2020 Notes receivable 1,442,944
Discount on Notes receivable 525,924
Land 590,500
Gain on Sale of land 326,520
(Record Sale of land in exchange of notes)
Working note 2 1 July, 2020 Notes receivable $408,520
Discount on notes receivable $182,644
Service revenue $225,876
(Record service performed in exchange of notes)

Calculations:

working note 1:

Face value of the notes receivable $1,442,944
Present value of notes receivable ($1,442,944 * 0.63552) ($917,020)
Discount on notes receivable $525,924

working note2:

Cash interest = Face value * interest rate

= $408,520 * 0.03

= 12,255.6 ~ 12,556

Present value of interest payment = Cash interest * Present value of annuity factor 12% @8 years

= $12,556 * 4.96764

= $60,883

Present value of Face value = Face value * Present value of annuity factor

= $408,520 * 0.40388

= $164,993

Present value of Notes receivable = Present value of interest payment + Present value of face value

= $60,883 + $164,993

= $225,876

Discount on Notes receivable = Face value of notes receivable - Present value of notes receivable

= $408,520 - $225,876

= $182,644

ekkarill92 answered 2 years ago
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