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Alex777 [14]
3 years ago
13

On January 1, 2020, Hat Trick Manufacturing exchanged some equipment for a $750,000 zero-interest-bearing note due on January 1,

2023. The prevailing rate of interest for a note of this type at January 1, 2020 was 10%. The present value of $1 at 10% for three periods is 0.75. Hat Trick Manufacturing included __ as interest revenue on the 2021 income statement.
Business
1 answer:
Marina86 [1]3 years ago
4 0

Answer:

61,198.47

Explanation:

First we solve for the present value of the note receivables at January 1st, 2021 As we are asked for the interest revenue on the 2021 incoem statment

\frac{Maturity}{(1 + rate)^{time} } = PV  

Maturity  $750,000.00

time  2.00

rate  0.10000

\frac{750000}{(1 + 0.1)^{2} } = PV  

PV   619,834.7107

now, we calcualte the interest considering the 10% implicit interest

619,834.7107  x 0.10 = 61,198.47

This will be the interest revenu for the year 2021

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The entry it's less than the estimated value of 5% because the account "Allowance for Doubtful Accounts" had a balance of $2,000 on Credit.

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The new balance on Allowance for Doubtful Accounts as Debit of $1,500 means that when the entry of the adjustment is recorded it's necessary to compensate that value to show a  debit balance of $5,000., because the Allowance for Doubtful Accounts must reflect a credit balance.

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When the customers buy products on credits but then the company can't collect the debt, then it's necessary to write off the unpaid bill as uncollectible.

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When the company have the percentage of uncollectible accounts the journal entry required is Bad Expenses (debit) with Allowance for Uncollectible Accounts (credit)

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