E7-14. (Notes Receivable with Unrealistic Interest Rate) (LO 4, 6) On December 31, 2020, Ed Abbey...

E7-14.

(Notes Receivable with Unrealistic Interest Rate)

(LO 4, 6) On December 31, 2020, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2022, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%. (hint: look back in the notes to see whose rate of interest we used for discounting!)

Instructions

(a) Prepare the journal entry to record the transaction of December 31, 2020, for the Ed Abbey Co.

(b) Assuming Ed Abbey Co.'s fiscal year-end is December 31, prepare the journal entry for December 31, 2021.

(c) Assuming Ed Abbey Co.'s fiscal year-end is December 31, prepare the journal entry for December 31, 2022.

Solutions

Expert Solution

Solution

Date	particular	Debit	Credit
December 31,2020	Notes receivable. Dr	$200000
	To service revenue		$165290
	To discount on notes receivable		$34710
	( Being the service given against the notes receivable)

Note

Calculating PV of service revenue as on December 31,2020

PV = future value* present value of $1 at 10% for 2 years

PV =$200000*0.82645

PV =$165290

Date	General journal	Debit	Credit
December 31 2021	discount on notes receivable. Dr	$16529
	To interest revenue		$16529
	(Being interest revenue recorded)

Notes

Discount on notes receivable in 2021

=Discount receivable in 2020*10%

=$165290*10%

=$16529

Date	General journal	Debit	Credit
December 31, 2022	discount on notes receivable. Dr	$181818
	To interest revenue ($34710-$16529)		$18181
	( Being interest revenue recorded)
	Cash. Dr	$200000
	To notes receivable		$200000
	(Being record the cash received against notes receivable)

ekkarill92 answered 1 year ago

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