On October 1, 2015, Arden Farm Equipment Company sold a pecan-harvesting machine

Question

On October 1, 2015, Arden Farm Equipment Company sold a pecan-harvesting machine to Valeo Brothers Farm, Inc. In lieu of a cash payment Valeo Brothers gave Arden a 2-year, $120,000,8% note. The market rate of interest for a note of similar risk is 10%.The note required interest to be paid annually on October 1st. Ardern's financial statements are prepared on a calendar basis.(note this means they prepare financial statements on Dec 31st) Required:[Record the required journal entries for Arden Farm Equipment Company for the first year.

Explanation / Answer

Amount (in $) Date Particulars Debit Credit 01.10.15 8% Notes Receivable 120000.00         Machine 120000.00 31.12.15 Interest Income Receivable 2400.00          Interest on 8% Notes 2400.00 01.10.16 Bank 9600.00     Interest Income Receivable 2400.00     Interest on 8% Notes 7200.00 Stated Interest Rate 8% Market Interest Rate 10% Face Value of Note $        1,20,000.00 PV of the principal 2year & 10% $         99,173.55 Present value of interest $                                                          8,727.27 $               7,933.88 $               1,15,834.71 Difference $      4,165.29

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