Question

Recording Entries for Long-Term Note Receivable; Effective-Interest Method

On January 1, 2020, Jacobs Company sells land financed through a $64,000 note, issued by Andress Company. The note is a $64,000, 8%, annual interest-bearing note. Andress agrees to repay the $64,000 proceeds on December 31, 2021. The prevailing interest rate on similar notes is 9%. Assume that the cost of the land is equal to the fair value of the note.

Required

Prepare all entries for Jacobs over the note term, including any year-end adjustments. Use the effective interest method to amortize the discount.

Date	Account Name	Dr.	Cr.
Jan. 1, 2020	Answer

Answer	Answer
	Answer

Answer	Answer
	Land	Answer	Answer
Dec. 31, 2020	Cash	Answer	Answer
	Answer

Answer	Answer
	Answer

Answer	Answer
Dec. 31, 2021	Cash	Answer	Answer
	Answer

Answer	Answer
	Answer

Answer	Answer
	To record interest on note
Dec. 31, 2021	Answer

Answer	Answer
	Answer

Answer	Answer
	To record settlement of note

Answer 1

Ans.

Interest Bearing Note:-

An interest bearing note is loan which is issued from a lender to a borrower. It is long term loan carries interest at a specific rate, the borrower is to pay back the entire amount of the principal with interest during the loan term.

Requirement:-

Prepare all entries for Jacobs over the note term, including any year-end adjustments. Use the effective interest method to amortize the discount.

Present value factor	Amount		Rate	Amount
Sale revenue {$64,000 x PVF (9%, 2yrs)}	$64,000	x	0.84168	$53,868
Interest (8% annual interest bearing note) x PVIF (9%, 2yrs)	$5,120	x	1.759	$9,006
Total				$62,874

The effective interest method to amortize the discount.

Date	Cash A	Interest revenue B	Discount amortization C	Unamortized discount D	Carrying value E
	8% annual interest bearing note	9% on Carrying value	B - A=C	Previous date unamortized discount - C	Previous date carrying value + C
1 Jan 2020		$0	$0	$1,126	$62,874
31 Dec 2020	$5,120	$5,659	$539	$587	$63,413
31 Dec 2021	$5,120	$5,707	$587	$0	$64,000

Journal Entries

Date	Account Name	Dr. Amount	Cr. Amount
Jan.1, 2020	Notes Receivable	$64,000
	Discount on Notes Receivable		$1,126
	Land		$62,874
	(To record sale)
Dec.31, 2020	Cash	$5,120
	Discount on Notes Receivable	$539
	Interest Revenue ($62,874 x 9%)		$5,659
	(To record amortization of discount)
Dec.31, 2021	Cash	$5,120
	Discount on notes Receivable	$587
	Interest Revenue [($62,874 + $539) x 9%]		$5,707
	(To record interest on note)
Dec.31, 2021	Cash	$64,000
	Notes Receivable		$64,000
	(To record settlement of note)