Question

2. On December 31, 2014, Franklin Company performed consulting services for Hensley Corporation. Hensley was short on cash, so Franklin Company agreed to accept a $200,000 zero-interest bearing note due on December 31, 2016 as payment in full. Hensley is somewhat of a credit risk and typically borrows funds at a rate of 10%.

Prepare the journal entry to record the transaction of December 31, 2014 for Franklin Company.

Assume Franklin’s fiscal year end is December 31, prepare the journal entry for December 31, 2015.

Assume Franklin’s fiscal year end is December 31, prepare the journal entry for December 31, 2016.

Answer 1

Solution:

Present value of note = $200,000 * PV factor at 10% for 2nd period

= $200,000 * 0.82645 = $165,290

Journal Entries - Franklin Company
Date	Particulars	Debit	Credit
31-Dec-14	Note receivables Dr	$200,000.00
	To Service revenue		$165,290.00
	To Discount on note receivables		$34,710.00
	(To record consulting service revenue)
31-Dec-15	Discount on note receivables Dr	$16,529.00
	To Interest revenue ($165,290*10%)		$16,529.00
	(To record interest accrual)
31-Dec-16	Cash Dr	$200,000.00
	Discount on note receivables Dr	$18,181.00
	To Note receivables		$200,000.00
	To Interest revenue		$18,181.00
	(To record receipt at maturity)