Question

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%.

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.
d. Complete the bank reconciliation

Answer 1

Requirement 1

Date	Particulars	Debit ($)	Credit ($)
	Notes receivable	200,000
	Discount on notes receivable		34,711
	Sales revenue		165,289
	(To record notes receivable)

PV of $200,000 due in 2 years at 10% = $200,000*.82645 = 165,290

Requirement 2

Date	Particulars	Debit ($)	Credit ($)
	Discount on notes receivable	16,259
	Interest revenue		16,259
	(To record interest revenue)

Requirement 3

Date	Particulars	Debit ($)	Credit ($)
	Discount on notes receivable (34,710 -16529 )	18,182
	Interest revenue		18,182
	(To record interest revenue)
	Cash	200,000
	Notes receivable		200,000
	(To record receipt of cash against receivables)