On July 1, 2020, Sweet Inc. made two sales.

1. It sold land having a fair value of $909,890 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,431,725. The land is carried on Sweet's books at a cost of $594,900.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $409,660 (interest payable annually).

Sweet Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Required:
Record the two journal entries that should be recorded by Sweet Inc. for the sales transactions above that took place on July 1, 2020.

Answer:

1.

DR Note Receivable                                       $1,431,725

      CR  Land                                                                       $594,900

             Gain on Disposal of land                                      $‭314,990‬

              Discount on Notes Receivable                           $521,835

Working

Gain on disposal = 909,890 - 594,900 = $‭314,990‬

Discount on Notes receivable = 1,431,725 - 909,890 = $521,835

2.

First find present value of the 8-year promissory note;

= 409,660 / ( 1 + 12%)⁸

= $165,454.80

Annual payment of 3% = 3% * 409,660 = $‭12,289.8‬0

Paid every year for 8 years, the present value at 12% is;

= ‭12,289.8‬0 * Present value interest factor for annuity, 12%, 8 years

= ‭12,289.8‬0 * 4.9676

= $‭61,050.81

Present value of the note (revenue for services rendered) = ‭61,050.81 + 165,454.80 = $‭226,505.61‬

Discount on note receivable = 409,660 - ‭226,505.61‬ = $‭183,154.39‬

DR Notes Receivable                                        $409,660

     CR Service Revenue                                                        $‭226,505.61‬

            Discount on Notes Receivable                                 $$‭183,154.39‬

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