Question

On January 1, 2020, Jacobs Company sells land financed through an $80,000 note, issued by Andress Company. The note is an $80,000, 8%, annual interest-bearing note. Andress agrees to repay the $80,000 proceeds on December 31, 2021. The prevailing interest rate on similar notes is 11%. Assume that the cost of the land is equal to the fair value of the note.
Required:
Prepare all entries for Jacobs over the note term, including any year-end adjustments. Use the effective interest method to amortize the discount.

Answer 1

Answer:

Entries are shown below.

Explanation:

To record the journal entries, we first need to calculate interest payment and principal as per the present value. This is done below:

                                                    PV Factor     Present Value

Interest Payment     $6,400           1.7125         $10,960

Principal                   $80,000         0.8116        $64,928

                                                                           $75,888

Journal Entries

Date                Particular                            Debit ($)        Credit ($)    Working  

Jan 1, 2020 Note Receivable                80,000  

                       Discount on Receivable              4,112  

                       Land                                             75,888  

Dec 31, 2020  Cash                                6,400  

                        Discount on Receivable 1,948                    (8348-6400)

                        Interest Revenue                               8,348     (75888*11%)

Dec 31, 2021   Cash                                  6,400  

                         Discount on  Receivable      2,162             (4279-3600)

                         Interest Revenue                             8,562

                                                                                                (75888+1,948)*11%

Dec 31, 2021    Cash                                  80,000  

                          Notes Receivable                                 80,000