Expert Q&A; Done (Note Transactions at Unrealistic Interest Rates) On July 1, 20

Question

Expert Q&A; Done (Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales. 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's books at a cost of $590,000 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 1. Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017 2. Prepare amoritization schedules, & make all entires for the life of the notes Need help with all of number 2

Explanation / Answer

First Transaction:

Present value of the Note Receivable: $ 700,000.

Discount on Note Receivable : $ 1,101,460 - $ 700,000 = $ 401,460.

Second Transaction:

Face value of the note : $ 400,000.

Present value of $ 400,000 discounted at 12%, n=8 years = $ 400,000 x 0.40388 = $ 161,552

Present value of annual interest of $ 12,000 ( $ 400,000 x 3%) at 12% discount rate, n=8 years = $ 12,000 x 4.96764 =

$ 59,612

Present value of total cash inflows = $ 221,164

2. Amortization Schedule: Effective Interest Rate 12 %.

Amortization Table: Effective Interest Rate 12%

Transaction # Date Account Titles Debit Credit $ $ 1. July 1 Note Receivable 1,101,460 Discount on Note Receivable 401,460 Land 590,000 Gain on Disposal of Land 110,000 2. July 1 Note Receivable 400,000 Discount on Note Receivable 178,836 Service Revenue 221,164

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