Chapter 13, Problem 20P

1.

To determine

Prepare the necessary journal entries on Company L for January 1, 2016, through December 31, 2018.

Explanation of Solution

Note receivable: Note receivable refers to a written promise by the debtor for the amounts to be received within a stipulated period of 60-90 days or longer time. This written promise is issued by a debtor or, a borrower to the lender or, creditor. Notes receivable is an asset of a business.

Record the sale of machinery on January 1, 2016.

Date	Account Title and Explanation	Debit	Credit
January 1, 2016	Notes receivable	$180,000.00
	Accumulated depreciation (3)	$42,000.00
	Gain on sale of machinery (2)		$31,211.12
	Discount on notes receivable (1)		$30,788.88
	Machinery		$160,000.00
	(To record the gain on sale of machinery and  the machinery is sold on note)

Table (1)

Working note (1):

Calculate the amount of discount on notes receivable.

$\begin{array}{c}\text{Discount on notes receivable=}\left[\begin{array}{l}\text{Notes receivable}-\text{Fair value}\\ \text{machinery on January 1, 2016}\end{array}\right]\\ =\$180,000-\$149,211.12\\ =\$30,788.88\end{array}$

Working note (2):

Calculate the amount of gain on sale of land.

$\begin{array}{c}\text{Gain on sale of land = Fair market value on the date of sale}-\text{Cost of land}\\ =\$149,211.12-\$118,000\\ =\$31,211.12\end{array}$

Working note (3):

Calculate the amount of accumulated depreciation.

$\begin{array}{c}\text{Accumulated depreciation=Cost of machinery}-\text{Current book value}\\ \text{=\$160,000}-\$118,000\\ =\$42,000\end{array}$

Record the interest income earned on note receivable and the collection of note receivable for the year ended December 31, 2016.

Date	Account Title and Explanation	Debit	Credit
December 31, 2016	Cash	$60,000.00
	Discount on notes receivable	$14,921.11
	Interest income (5)		$14,921.11
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of first instalment)

Table (2)

Working note (4):

Calculate the amount of interest rate.

$\begin{array}{c}\text{Present value of machinery=Annual installment }\times \text{Present value of ordinary annuity}\\ \text{\$149,211}\text{.12=\$60,000}\times {\text{p}}_{\text{On=3,i=?}}\\ \$\text{149,211}\text{.12=\$60,000}\times \text{Factor}\\ \text{Factor=}2.486852\end{array}$

Working note (5):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = Present vale of the machinery sold }\times \text{interest rate}\\ \text{=\$149,211}\text{.12}\times \text{10\%}\\ \text{=\$14,921}\text{.11}\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2017.

Date	Account Title and Explanation	Debit	Credit
December 31, 2017	Cash	$60,000.00
	Discount on notes receivable	$10,413.22
	Interest income (6)		$10,413.22
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of second instalment)

Table (3)

Working note (6):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the machinery +interest}\\ \text{income earned on December 31, 2016}-\\ \text{Collection of first installment}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$149,211}\text{.12+\$14,921}\text{.11}-\$60,000\right]\times \text{10\%}\\ \text{=\$10,413}\text{.22}\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2018.

Date	Account Title and Explanation	Debit	Credit
December 31, 2018	Cash	$60,000.00
	Discount on notes receivable	$5,454.55
	Interest income (7)		$5,454.55
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of second instalment)

Table (4)

Working note (7):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the machinery +interest}\\ \text{income earned on December 31, 2016+}\\ \text{interest income earned on December 31, 2017}-\\ \text{Collection of first and second installment}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$149,211}\text{.12+\$14,921}\text{.11+\$10,413}\text{.22}-\$120,000\right]\times \text{10\%}\\ \text{=\$5,454}\text{.55}\end{array}$

2.

To determine

Prepare the notes receivable portion of Company L’s balance sheet on December 31, 2016 and 2017.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the notes receivable portion of Company L’s balance sheet on December 31, 2016 and 2017.

Balance sheet (Partial)
As at December 31
Assets	December 31, 2016	December 31, 2017
Notes receivable	$120,000.00 (8)	$60,000.00 (10)
Less: Discount on notes receivable	($15,867.77) (9)	($5,454.55) (11)
Total notes receivable	$104,132.23	$54,545.45

Table (5)

Working notes (8):

Determine the amount of notes receivable at December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2019}\end{array}\}\text{=}\left[\begin{array}{l}\text{Notes receivable at January 1, 2016}-\text{Collection}\\ \text{of notes receivable at December 31, 2016}\end{array}\right]\\ =\$180,000-\$60,000\\ =\$120,000\end{array}$

Working notes (9):

Determine the amount of discount on notes receivable at December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2016}\end{array}\}=\left[\begin{array}{l}\text{Discount on notes receivable at January 1, 2016}-\\ \text{Interest income recognized at December 31, 2016}\end{array}\right]\\ =\$30,788.88-\$14,921.11\\ =\$15,867.77\end{array}$

Working notes (10):

Determine the amount of notes receivable at December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2017}\end{array}\}\text{=}\left[\begin{array}{l}\text{Notes receivable at December 31, 2016}-\text{Collection}\\ \text{of notes receivable at December 31, 2017}\end{array}\right]\\ =\$120,000-\$60,000\\ =\$60,000\end{array}$

Working notes (11):

Determine the amount of discount on notes receivable at December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2017}\end{array}\}=\left[\begin{array}{l}\text{Discount on notes receivable at December 31, 2016}-\\ \text{Interest income recognized at December 31, 2017}\end{array}\right]\\ =\$15,867.77-\$10,413.22\\ =\$5,454.55\end{array}$