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14 September, 04:22

On January 1, 2014, Fishbone Corporation sold equipment to Lost Company that cost $250,000 and that had accumulated depreciation of $100,000 on the date of sale. Fishbone received as consideration a $240,000 non-interest-bearing note due on December 31, 2016. The prevailing rate of interest for a note of this type on January 1, 2014, was 5%.

Record the 1/1/14 transaction for Fishbone and all necessary entries from 2014-2016. Record the 1/1/14 transaction for Lost Company and all necessary enrties from 2014-2016.

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  1. 14 September, 04:42
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    Answer and Explanation:

    Transaction in the books of purchaser of equipment

    Face value of zero interest bearing notes issued $240,000

    Maturity period 3 years

    Prevailing rate of interest for such type of notes 5%

    PVF for 3rd year at 10 % 0.864

    Present Value of Notes on Jan, 01 2014 $207,360

    ($240,000 * 0.864)

    Discount on notes $32,640

    ($240,000 - $207,360)

    Present value of notes will be the capitalized value of equipment

    Discount Amortization and interest expense schedule

    Opening Effective interest Discount Amortization of

    Balance at 5% Amortization balance (equal to interest expense)

    a b a + b

    $207,360 $10,368 $217,728 $10,368

    $217,728 $10,886 $228,614 $10,886

    $228,614 $11,426 $240,000 $11,426

    a. Jan, 1 2014

    Equipment Dr, $207,360

    Discount on Issue of notes Dr, $32,640

    To Notes Payable $240,000

    (Being issue of notes and purchase of equipment is recorded)

    b. Dec 31,2014

    Interest Expense Dr, $10,368

    To Discount on issue of notes $10,368

    (Being the interest expense and amortization of discount is recorded)

    c. Dec 31, 2015

    Interest Expense Dr, $10,886

    To Discount on issue of notes $10,886

    (Being the interest expense and amortization of discount is recorded)

    d. Dec 31,2016

    Interest Expense Dr, $11,426

    Notes Payable Dr, $240,000

    To Discount on issue of notes $11,426

    To Cash $240,000

    (Being the interest expense and amortization of discount, and liability of notes payable repaid is recorded)

    e. Jan, 1 2014

    Notes Receivable Dr, $207,360

    To Equipment $150,000

    To Gain on sale of equipment $57,360

    (Being the sale of equipment against zero interest bearing notes receivable is recorded)

    f. Dec 31,2014

    Notes Receivable Dr, $10,368

    To Interest income on notes receivable $10,368

    (Being the interest income at year end is recorded)

    g. Dec 31, 2015

    Notes Receivable Dr, $10,886

    To Interest income on notes receivable $10,886

    (Being the interest income at year end is recorded)

    h. Dec 31,2016

    Notes Receivable Dr, $11,426

    To Interest income on notes receivable $11,426

    (Being the interest income at year end is recorded)

    i. Dec 31,2016

    Cash Dr, 240,000

    To Notes Receivable $240,000

    (Being Notes receivable matured and cash received is recorded)
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