Question

On December 31, 2018, Kohl Company performed engineering consulting services for Hemingway, Inc. Hemingway was short of cash, and Kohl Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2020, as payment in full. Hemingway is somewhat of a credit risk and typically borrows funds at a rate of 10%. Kohl is much more creditworthy and has various lines of credit at 6%.

Prepare the following journal entries for Kohl Co.:

(a) Prepare the journal entry to record the transaction of December 31, 2018

(b) Prepare the adjusting journal entry for December 31, 2019

(c) Prepare the adjusting journal entry and the collection of the note for December 31, 2020

Please show supporting computations.

Answer 1

	Journal Entries
	Date	Accounts			Dr Amount	Cr Amount
	31-12-2018	Hemingway Inc A/c			$ 1,65,289.26
			To Consulting Fees A/c			$    1,65,289.26
		(to record revenue)
		Note Receivable A/c			$ 1,65,289.26
			To Hemingway Inc A/c			$    1,65,289.26
		(to record note receivable)
	31-12-2019	Interest Receivable A/c			$     16,528.93
			To Interest on Note A/c			$        16,528.93
		(being interest income due on Note Receivable)
	31-12-2020	Interest Receivable A/c			$     18,181.82
			To Interest on Note A/c			$        18,181.82
		(being interest income on Note Receivable)
		Bank A/c			$ 2,00,000.00
			To Note Receivable A/c			$    1,65,289.26
			To Interest Receivable A/c			$        34,710.74
		(to record receipt of Note and Interest due)
	Computation:
	Note: Relevant rate of return(or IRR or discounting rate) is 10%.
	For Note Receivable			=200000/(1.1^2)
				$ 1,65,289.26
	For Interest Receivable in 1 Year			=165289.26*10%
				$     16,528.93
	For Interest Receivable in 2 year			=(165289.26+16525.93)*10%
				$     18,181.82