Question

On December 31, 2008, 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, 2010, 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%.
Instructions
(a) Prepare the journal entry to record the transaction of December 31, 2008, for the Ed Abbey Co.
(b) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2009.
(c) Assuming Ed Abbey Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2010.
(d) Assume that Ed Abbey Co. elects the fair value option for this note. Prepare the journal entry at December 31, 2009, if the fair value of the note is $185,000.

Answer 1

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