California contracted with Love Corporation to have them construct a custommade

Question

California contracted with Love Corporation to have them construct a custommade lathe. The lathe was completed and ready for use on January 1, 2016. California paid for the lathe by issuing a $300,000 note due in three years. Interest, at 2%, was payable annually on December 31 of each year. The market price (FMV) of the lathe was unknown. It was determined by comparison with simlar lathe's for which 6% was a reasonable rate of interest.

Required:

1. Prepare the journal entry on January 1, 2016 for Love Corporation's sale of the lathe.

2. Prepare the journal entries to record (a) interest for each of the three years and (b) receipt of payment of the note at maturity.

Explanation / Answer

Jan 1,2016 Note Receivable $ 300,000.00 Sales $ 300,000.00 Dec 31,2016 Interest Receivable 6000 Interest Income 6000 Jan 1, 2017 Cash 6000 Interest Receivable 6000 Dec 31,2017 Interest Receivable 6000 Interest Income 6000 Jan 1, 2018 Cash 6000 Interest Receivable 6000 Dec 31,2017 Cash 306000 Interest Income 6000 Note Receivable 300000

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