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In: Accounting

On July 1, 2017, Monty Inc. made two sales. 1. It sold land having a fair...

On July 1, 2017, Monty Inc. made two sales.

1. It sold land having a fair value of $915,830 in exchange for a 3-year zero-interest-bearing promissory note in the face amount of $1,252,520. The land is carried on Monty's books at a cost of $597,600.
2. It rendered services in exchange for a 5%, 6-year promissory note having a face value of $402,550 (interest payable annually).

Monty 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 11% interest.

Record the two journal entries that should be recorded by Monty Inc. for the sales transactions above that took place on July 1, 2017

Solutions

Expert Solution

Answer to Transaction 1
Notes receivable 1252520
Land 597600
Discount on Notes receivable (1252520 - 915830) 336690
Gain on disposal of Land (915830 - 597600) 318230
Answer to Transaction 2
Notes receivable 402550
Discount on Notes receivable (402550-300369.82) 102180.18
Service revenue 300369.82
Present value factor at 11% for 6th year (1/1.11^6) 0.5346
Maturity Value 402550
Present value of Maturity value ( 0.5346*402550) 215219.67
Interest payable annually (402550*5%) 20127.5
Present value of interest payable for all the 6 years (5.0756*20127.5) 85150.15
Present value of note (215219.6686+102160.9921) 300369.82
Discount on Notes receivable (402550 - 300369.82)                                                                               1,02,180.18
Computation of discounting factor
1/1.11^1 0.9009
1/1.11^2 0.8116
1/1.11^3 0.7312
1/1.11^4 0.6587
1/1.11^5 0.5935
1/1.11^6 0.5346
Cumulative discounting factor for 6 years 4.2305

ekkarill92 answered 3 years ago
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