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Chapter 7: Question: E7-13 (page 367)

(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.

1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt鈥檚 books at a cost of \(590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).

Agincourt 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.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.

Short Answer

Expert verified

The business entity generates a gain of$110,000 on land sale.

Step by step solution

01

Definition of Fair Value

The fair value of any asset is defined as the price agreed upon by both buyer and seller. This value is not similar to market value.

02

Journal entry for the sale of land

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Note receivable

$1,101,460

Discount on note receivable

$401,460

Land

$590,000

Gain on sale of land

$110,000

Working note: Calculation of discount

Particular

Amount $

Face value

$1,101,460

Less: Present value of Face value of note $1,101,460 @12% for 4 periods$1,101,460脳0路63552

($700,000)

Discount

$401,460

03

Journal entry for service provided

Date

Accounts and Explanation

Debit $

Credit $

1 July 2017

Note receivable

$400,000

Discount on note receivable

$178,804

Service revenue

$221,196

Working note: Calculation of discount on note receivable

Particular

Amount

Maturity value

$400,000

Less: Present value of $400,000 for 8year @ 12%

$400,000脳0路40389

(161,556)

Less: Present value of $12,000$400,000脳3% for 8 years @ 12% (PVAF: 4.97)

(59,640)

Discount on note receivable

$178,804

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Most popular questions from this chapter

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.

(Transfer of Receivables) Use the information for Jones Company as presented in E7-20. Jones is planning to factor some accounts receivable at the end of the year. Accounts totaling \(25,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse obligation is \)1,200.

Instructions

(a) Prepare the journal entry to record the sale of the receivables.

(b) Compute Jones鈥檚 accounts receivable turnover for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio.

What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?

Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.

(Transfer of Receivables without Recourse) JFK Corp. factored $300,000 of accounts receivable with LBJ Finance Corporation on a without recourse basis on July 1, 2017. The receivables records are transferred to LBJ Finance, which will receive the collections. LBJ Finance assesses a finance charge of 1陆% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.

Instructions

(a) Prepare the journal entry on July 1, 2017, for JFK Corp. to record the sale of receivables without recourse.

(b) Prepare the journal entry on July 1, 2017, for LBJ Finance Corporation to record the purchase of receivables without recourse.
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