Chapter 13, Problem 21P

1.

To determine

Prepare the journal entries on Company S’ books for January 1, 2016, through December 31, 2017, in regard to the Company B.

Explanation of Solution

Note receivable: Note receivable refers to a written promise received by the creditor from the debtor in formal, for the amounts to be settled within a stipulated period of time. This written promise is issued by a debtor or borrower to the lender or creditor. Notes receivable is an asset of a business. Notes receivable often used for the credit periods of more than 60 days.

Record the sale of land on January 1, 2016.

Date	Account Title and Explanation	Debit	Credit
January 1, 2016	Cash	$15,000.00
	Notes receivable	$15,000.00
	Discount on notes receivable (4)		$2,324.62
	Gain on sale of land (3)		$4,675.38
	Land		$23,000.00
	(To record the gain on sale of land and the land is sold partly for cash and partly for note)

Table (1)

Working note (1):

Calculate the present value of the note.

$\begin{array}{c}\text{Present value of the note =Present value of two annual installment}\\ \text{=}\left(\text{Annual installment }\times {\text{p}}_{\text{on=2, i=12\%}}\right)\\ \text{=}\left(\text{\$7,500}\times \text{1}\text{.690051}\right)\\ =12,675.38\end{array}$

Working note (2):

Calculate the present value of the land.

$\begin{array}{c}\text{Present value of the land = Down payment + Present value of the note}\\ \text{=\$15,000+}\$12,675.38\\ =\$27,675.38\end{array}$

Note:

In the above formula, P_O represents present value factor of an ordinary annuity. Factor for P_{On=2, i=12%} is determined using table 4 of the time value of money module.

Working note (3):

Calculate the amount of gain on sale of land.

$\begin{array}{c}\text{Gain on sale of land = Present value of the note}-\text{Book value of the land}\\ =\$27,675.38-\$23,000\\ =4,675.38\end{array}$

Working note (4):

Calculate the amount of discount on notes receivable.

$\begin{array}{c}\text{Discount on notes receivable=}\left[\begin{array}{l}\text{Notes receivable}-\text{Note's present}\\ \text{value of an ordinary annuity}\end{array}\right]\\ =\$15,000-\$12,675.38\\ =\$2,324.62\end{array}$

Record the interest income earned on note receivable, and the receipt of first instalment for the year ended December 31, 2016.

Date	Account Title and Explanation	Debit	Credit
December 31, 2016	Cash	$7,500.00
	Discount on notes receivable	$1,521.05
	Interest income (5)		$1,521.05
	Notes receivable		$7,500.00
	(To record the earnings of interest income on non-bearing-interest note, and collection of first instalment)

Table (2)

Working note (5):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = Present vale of the note }\times \text{interest rate}\\ \text{=\$12,675}\text{.38}\times \text{12\%}\\ \text{=\$1,521}\text{.05}\end{array}$

Record the interest income earned on note receivable, and the receipt of first instalment for the year ended December 31, 2017.

Date	Account Title and Explanation	Debit	Credit
December 31, 2017	Cash	$7,500.00
	Discount on notes receivable	$803.57
	Interest income (6)		$803.57
	Notes receivable		$7,500.00
	(To record the earnings of interest income on non-bearing-interest note, and collection of second instalment)

Table (3)

Working note (6):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the note +interest}\\ \text{income earned on December 31, 2016}\\ -\text{Amount of first installment paid}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$12,675}\text{.38+\$1,521}\text{.05}-\$7,500\right]\times \text{12\%}\\ \text{=\$803}\text{.57}\end{array}$

2.

To determine

Record the journal entries in the books of Company S for July 1, 2016, through July 1, 2018, in regard to the Company H.

Explanation of Solution

Record the depreciation expenses for 6 months.

Date	Account Title and Explanation	Debit	Credit
July 1, 2016	Depreciation expenses (7)	$2,250.00
	Accumulated depreciation		$2,250.00
	(To record the depreciation expenses for 6 month)

Table (4)

Working note (7):

Calculate the depreciation expenses for 6 months from January 1, 2016 to July 1, 2016.

$\begin{array}{c}\text{Depreciation expenses for 6 months= Depreciation per year }\times \frac{6\text{months}}{12\text{months}}\\ =\$4,500\times \frac{6}{12}\\ =\$2,250\end{array}$

Record the sale of building on July 1, 2016.

Date	Account Title and Explanation	Debit	Credit
July 1, 2016	Notes receivable	$100,000.00
	Accumulated depreciation (8)	$24,750.00
	Discount on notes receivable (9)		$17,394.60
	Gain on sale of building (10)		$17,355.40
	Building		$90,000.00
	(To record the gain on sale of building and the building is sold on note)

Table (5)

Working note (8):

Calculate the amount of accumulated depreciation.

$\begin{array}{c}\text{Accumulated depreciation=}\left[\begin{array}{l}\left(\text{Accumulated depreciation for 5 years}\right)\text{+}\\ \text{Accumulated depreciation for 6months}\end{array}\right]\\ =\left[\begin{array}{l}\left(\text{Accumulated depreciation per year}\times \text{5 years}\right)\text{+}\\ \text{Accumulated depreciation for 6months}\end{array}\right]\\ =\left[\left(\$4,500\times 5\right)+\$2,250\right]\\ =\$24,750\end{array}$

Working note (9):

Calculate the amount of discount on notes receivable.

$\begin{array}{c}\text{Discount on notes receivable=}\left[\begin{array}{l}\text{Notes receivable}-\text{Fair value}\\ \text{building on July 1, 2018}\end{array}\right]\\ =\$100,000-\$82,644.60\\ =\$17,355.4\end{array}$

Working note (10):

Calculate the amount of gain on sale of building.

$\begin{array}{c}\text{Gain on sale of building = }\left[\begin{array}{l}\text{Fair market value on the date of sale}-\\ \left(\begin{array}{l}\text{Book value of building as on December 31, 2018}\\ \text{Accumulated depreciation for 6 months}\end{array}\right)\end{array}\right]\\ =\left[\$82,644.60-\left(\$67,500-\$2,250\right)\right]\\ =\$17,394.60\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2016.

Date	Account Title and Explanation	Debit	Credit
December 31, 2016	Discount on notes receivable	$4,132.23
	Interest income (12)		$4,132.23
	(To record the earnings of interest income for 6 months)

Table (6)

Working note (11):

Calculate the amount of interest rate.

$\begin{array}{c}\text{Present value of building=}\left[\begin{array}{l}\text{Future value of note receivable}\times \\ \text{Present value of ordinary annuity}\end{array}\right]\\ \text{\$82,644}\text{.60=\$100,000}\times {\text{p}}_{\text{On=2,i=?}}\\ \$\text{82,644}\text{.60=\$100,000}\times \text{Factor}\\ \text{Factor=}0.826446\end{array}$

Working note (12):

Calculate the amount of interest income earned for 6 months (from July 1 to December 31, 2016).

$\begin{array}{c}\text{Interest income = Present vale of the machinery sold }\times \text{interest rate}\times \frac{6\text{months}}{12\text{months}}\\ \text{=\$82,644}\text{.60}\times \text{10\%}\times \frac{6}{12}\\ \text{=\$8,264}\text{.46}\times \frac{6}{12}\\ =\$4,132.23\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2017.

Date	Account Title and Explanation	Debit	Credit
December 31, 2017	Discount on notes receivable	$8,677.68
	Interest income (13)		$8,677.68
	(To record the earnings of interest income for 1 year)

Table (7)

Working note (13):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the building +interest}\\ \text{income earned on December 31, 2016}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$82,644}\text{.60+\$4,132}\text{.23}\right]\times \text{10\%}\\ \text{=\$8,677}\text{.68}\end{array}$

Record the interest income earned on note receivable for the last 6 months.

Date	Account Title and Explanation	Debit	Credit
July 1, 2018	Discount on notes receivable (14)	$4,545.49
	Interest income		$4,545.49
	(To record the earnings of interest income for last 6 months)

Table (8)

Working note (14):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\frac{\left[\begin{array}{l}\text{ Present vale of the building +interest}\\ \text{income earned on December 31, 2016}\end{array}\right]\times \text{interest rate}}{2}\\ \text{=}\frac{\left[\text{\$82,644}\text{.60+\$8,264}\text{.46}\right]\times \text{10\%}}{2}\\ \text{=}\frac{\text{\$9,090}\text{.906}}{2}\\ =\$4,545.45\end{array}$

Record the collection of cash on note on due date.

Date	Account Title and Explanation	Debit	Credit
July 30, 2018	Cash	$100,000.00
	Notes receivable		$100,000.00
	(To record the collection on note)

Table (9)

3.

To determine

Prepare the notes receivable portion of Company S’s balance sheet on December 31, 2016 and 2017.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the notes receivable portion of Company S’s balance sheet on December 31, 2016 and 2017.

Company S
Balance sheet (Partial)
As at December 31
Assets	December 31, 2016	December 31, 2017
Notes receivable	$107,500.00 (14)	$100,000.00 (16)
Less: Discount on notes receivable	($14,026.74) (15)	($4,545.49) (17)
	$93,473.26	$95,454.51

Table (10)

Working note (14):

Calculate the amount of notes receivable at December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2016}\end{array}\}\text{=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Notes receivable from Company B at}\\ \text{January 1, 2016}-\text{Collection of notes receivable}\\ \text{from Company B at December 31, 2016}\end{array}\right)+\\ \text{Notes receivable from Company H at July 1, 2016}\end{array}\right]\\ =\left(\$15,000-\$7,500\right)+\$100,000\\ =\$107,500\end{array}$

Working note (15):

Calculate the amount of discount on notes receivable at December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2016}\end{array}\}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Discount on Company B' notes receivable at}\\ \text{January 1, 2016}-\text{Interest income recognized}\\ \text{at December 31, 2016}\end{array}\right)+\\ \left(\begin{array}{l}\text{Discount on Company H' notes receivable at}\\ \text{July 1, 2016}-\text{Interest income recognized at}\\ \text{December 31, 2016}\end{array}\right)+\end{array}\right]\\ =\left[\left(\$2,324.62-\$1,521.05\right)+\left(\$17,355.40-\$4,132.23\right)\right]\\ =\$14,026.74\end{array}$

Working note (16):

Determine the amount of notes receivable at December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2017}\end{array}\}\text{=}\left[\begin{array}{l}\text{Notes receivable at December 31, 2016}\\ -\left(\begin{array}{l}\text{Collection}\text{of notes receivable }\\ \text{from Company B at December 31, 2017}\end{array}\right)\end{array}\right]\\ =\$107,500-\$7,500\\ =\$100,000\end{array}$

Working note (17):

Determine the amount of discount on notes receivable at December 31, 2017.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2017}\end{array}\}=\left[\begin{array}{l}\text{Discount on notes receivable at December 31, 2016}\\ -\left(\begin{array}{l}\text{Interest income recognized}\text{at }\\ \text{December 31, 2017on Company B' note}\end{array}\right)\\ -\left(\begin{array}{l}\text{Interest income recognized}\text{at }\\ \text{December 31, 2017 on Company H' note}\end{array}\right)\end{array}\right]\\ =\$14,026.74-\$803.57-\$8,677.68\\ =\$4,545.49\end{array}$