On January 1, 2021, the Apex Company exchanged some shares of common stock it had been...

On January 1, 2021, the Apex Company exchanged some shares of common stock it had been holding as an investment for a note receivable. The note principal plus interest is due on January 1, 2022. The 2021 income statement reported $4,620 in interest revenue from this note and a $7,500 gain on sale of investment in stock. The stock’s book value was $31,000. The company’s fiscal year ends on December 31.

Required: 1. What is the note’s effective interest rate?

2. Reconstruct the journal entries to record the sale of the stock on January 1, 2021, and the adjusting entry to record interest revenue at the end of 2021. The company records adjusting entries only at year-end.

Solutions

Expert Solution

Interest reported for the year is $4,620

Value of the note = Principal + Gain on sale of Investment

= $31000+$7500

=$38500

Effective Interest Rate = $4620/$38500

Effective Interest Rate = 0.12 or 12%

Journal Entry to record the sale of stock on January 1,2021
Date	Particular	Amount(DR)	Amount(CR)
January 1, 2021	Note Receivables	$ 38,500
	Investments		$ 31,000
	Gain on sale of Investments		$ 7,500

Adjusting Journal entries on December 31,2021
Date	Particular	Amount(DR)	Amount(CR)
December 31, 2021	Interest Receivables	$ 4,620
	Interest Revenue		$ 4,620

ekkarill92 answered 2 years ago

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