Chapter 6 Notes Flashcards
Barge Company sells goods to Tug Corp. in exchange for a $135,000 3-year note bearing 8% interest. The market rate of interest for a transaction of this nature for Tug is 12%. present value of 1 at 12% for 3 years is .71178 and the present value of an ordinary annuity of 1 at 12% for 3 years is 2.40183. If the sale occurred on January 1 and the fiscal year ends on December 31, the adjusting journal entry for interest revenue at the end of the first year using the effective-interest method (rounded to the nearest dollar) is
$14,644
((stated notePV)+(statedinterestPV annuity)market rate
Equestrian Roads sold $120,000 of goods and accepted the customer’s $120,000 10%,
1-year notes receivable in exchange. Assuming 10% approximates the market rate of return, what would be the debit in this journal entry to record the sale?
Debit Notes Receivable for $120,000
Assume Royal Palm Corp., an equipment distributor, sells a piece of machinery with a list price of $900,000 to Arch Inc. Arch will pay $975,000 in one year. Royal Palm Corp. normally sells this type of equipment for 90% of list price. How much should be recorded as revenue?
$810,000
At the beginning of 2024, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade notes receivable on its 2024 year-end balance sheet and $1,000 as sales revenue for 2024. What effect did this accounting for the note have on Gannon’s net earnings for 2024, 2025, 2026, and its retained earnings at the end of 2026, respectively?
Overstate, understate, understate, zero
Equestrian Roads accepted a customer’s $100,000 zero-interest-bearing six-month note in a sales transaction. The product sold normally sells for $92,000. If the sale was made on June 30, how much interest revenue from this transaction would be reported for the year ending December 31?
$8,000
Red Wing & Co. sold goods with a market price of $150,000 on April 1. They accepted a note from Shoreline Inc. for $150,000 due in two years, with interest paid each year on April 1, bearing 8% interest. If 8% interest approximates the market rate of interest for this transaction, what journal entry should be recorded to record the sale (ignore Cost of Goods sold) when the sale takes place?
Debit Notes Receivable $150,000, credit Sales Revenue $150,000
The present value of a note is determined by adding
the present value of the face amount and the present value of the annuity of interest receipts.
heephead Company sells land with a book value of $175,000 to Drum Corp. in exchange for a $280,000 zero-interest-bearing note payable in 3 years. The market rate of interest for a transaction of this nature for Drum is 8%. The present value of 1 at 8% for 3 years is .7938 and the present value of an ordinary annuity of 1 at 8% for 3 years is 2.5771. If the sale occurred on January 1 and the fiscal year ends on December 31, the adjusting journal entry for interest revenue at the end of the first year using the effective-interest method (rounded to the nearest dollar) is
$17,781
Beginning balance = PV of note which is face value * 0.7938
Beginning balance * interest rate = interest revenue
On December 31, 2025, Flint Corporation sold for $150,000 an old machine having an original cost of $270,000 and a book value of $120,000. The terms of the sale were as follows:
$30,000 down payment
$60,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2025 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
$105,547
(annuity is what is payable each year)
(annuity*PV)
Sheephead Company sells land with a book value of $175,000 to Drum Corp. in exchange for a $280,000 zero-interest-bearing note payable in 3 years. The market rate of interest for a transaction of this nature for Drum is 8%. What is the amount of the notes receivable less the unamortized discount at the time of the sale rounded to the nearest dollar? The present value of 1 at 8% for 3 years is .7938 and the present value of an ordinary annuity of 1 at 8% for 3 years is 2.5771.
$222,264
