Question

In: Accounting

On July 1, 2020, Metlock Inc. made two sales: 1. It sold excess land in exchange...

On July 1, 2020, Metlock Inc. made two sales:

1. It sold excess land in exchange for a four-year, non–interest-bearing promissory note in the face amount of $1,094,530. The land’s carrying value is $560,000.
2. It rendered services in exchange for an eight-year promissory note having a face value of $470,000. Interest at a rate of 3% is payable annually.


The customers in the above transactions have credit ratings that require them to borrow money at 11% interest. Metlock recently had to pay 6% interest for money it borrowed from British Bank.

3. On July 1, 2020, Metlock also agreed to accept an instalment note from one of its customers in partial settlement of accounts receivable that were overdue. The note calls for four equal payments of $21,700, including the principal and interest due, on the anniversary of the note. The implied interest rate on this note is 8%.


The tables in this problem are to be used as a reference for this problem.

Solutions

Expert Solution

No Date Account titles and explanation Debit Credit
1 July 1,2020 Note receivable (1094530 * 0.65873) 721000
Land 560000
Gain on sale of land 161000
(Land sold in exchange of note)
2 July 1,2020 Note receivable (Note:1) 294883
Sales revenue 294883
(Sales revenue recorded)
3 July 1,2020 Note receivable (Note:2) 71873
Accounts receivable 71873
(Instalment note accepted for partial settlement)
Note:1
Face value of note=$ 470000
It is received at the time of maturity
Now, let's find the present value of face value of bonds
Discount factor=Interest on money borrowed=6%
Present value of face value of notes=Face value of the bonds*Discount factor at 6% for the 8th year=470000*0.62741=$ 294883
Note:2
Equal payment=$ 21700
Discount factor=Implied interest rate=8%
Present value of note=Equal payment*Discount factor at 8% for 4 years=21700*3.31213=$ 71873
Instalment note receivable schedule
Date Cash collected Interest revenue Principal collected Note carrying amount
July 1,2020 71873
July 1,2021 21700 5750 15950 55923
July 1,2022 21700 4474 17226 38697
July 1,2023 21700 3096 18604 20093
July 1,2024 21700 1607 20093 0
Interest revenue=Beginning note carrying amount*Implied interest rate
Principal collected=Cash collected-Interest revenue
Ending note carrying amount=Beginning note carrying amount-Principal collected

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ekkarill92 answered 1 year ago
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