Question

South Company, a public company, sells large construction equipment. On 1 January 20X5, the company sold North Company a machine at a quoted price of $120,000. South collected $40,000 cash and received a two year note payable for the balance.

 

Required:

1. Give South’s required entries for the two years, assuming an interest bearing note, face value $80,000. (8% interest, simple interest, payable every 31 December.)

2. Assume that the market interest rate is still 8%. Give South’s required entries for the two years, assuming a 2% interest bearing note, face value $80,000. Prepare the entries based on the gross basis.

3. Compare the interest revenue and sales revenue under requirements 1 and 2.

4. Repeat requirement two above. Assume South is a private company that uses ASPE and has decided to use straight line amortization.

Answer 1

Requirement 1

 

1 January 20x5

       Cash................................................................................................ 40,000

       Note receivable............................................................................. 80,000

               Sales revenue.....................................................................................      120,000

 

31 December 20x5

       Cash.................................................................................................. 6,400

               Interest revenue ($80,000 x .08)........................................................         6,400

 

31 December 20x6

       Cash................................................................................................ 86,400

               Note receivable..................................................................................        80,000

               Interest revenue.................................................................................          6,400

 

Requirement 2

 

Gross Basis

 

1 January 20x5

       Cash................................................................................................   40,000

       Note receivable............................................................................... 80,000

               Discount on note receivable ($80,000 – $71,440*)...........................          8,560

               Sales revenue.....................................................................................         111,440

       

       * Present value of principal:

        $80,000 (P/F, 8%, 2)                            $68,587

        Present value of interest annuity

        $1,600 (P/A, 8%, 2)                                  2,853

                                                                       $71,440

 

31 December 20x5

       Cash..................................................................................................    1,600

       Discount on note receivable............................................................. 4,115

               Interest revenue ($71,440 x 8%)........................................................          5,715

 

31 December 20x6

       Cash................................................................................................    81,600

       Discount on note receivable ($8,560 – $4,115)............................... 4,445

               Note receivable..................................................................................        80,000

               Interest revenue (($71,440 + $4,115) x 8%), rounded......................        6,045

       

Requirement 3

 

                                                                        Req. 1                          Req. 2

Interest revenue:

       20x5                                                        $ 6,400                       $ 5,715

       20x6                                                           6,400                           6,045

Sales revenue:

       20x5                                                       120,000                       111,440

       20x6                                                                   0                                  0

 

Requirement 4

 

Gross Basis

 

1 January 20x5

       Cash................................................................................................  40,000

       Note receivable............................................................................... 80,000

               Discount on note receivable ($80,000 – $71,440*)...........................          8,560

               Sales revenue.....................................................................................         111,440

       

       * Present value of principal:

        $80,000 (P/F, 8%, 2)                            $68,587

        Present value of interest annuity

        $1,600 (P/A, 8%, 2)                                  2,853

                                                                       $71,440

 

31 December 20x5

       Cash..................................................................................................... 800

       Discount on note receivable (8,560 / 2)........................................ 4,280

               Interest revenue ................................................................................          5,880

 

31 December 20x6

       Cash................................................................................................  81,600

       Discount on note receivable (8,560/2)........................................... 4,280

               Note receivable..................................................................................        80,000

               Interest revenue.................................................................................          5,880