Chapter 13, Problem 23P

Notes Receivable On January 1, 2019, Lisa Company sold machinery with a book value of $118,000 to Mark Company. Mark signed a $180,000 non-interest-bearing note, payable in three $60,000 annual installments on December 31, 2019, 2020, and 2021. The fair value of the machinery was $149,211.12 on the date of sale. The machinery had been purchased by Lisa at a cost of $160,000.

Required:

1. 1. Prepare all the journal entries on Lisa’s books for January 1, 2019, through December 31, 2021.
2. 2. Prepare the notes receivable portion of Lisa’s balance sheet on December 31, 2019 and 2020.

To determine

Prepare the necessary journal entries on Company L for January 1, 2019, through December 31, 2021.

Explanation of Solution

Note receivable: Note receivable refers to a written promise by the debtor for the amounts to be received within a stipulated period of 60-90 days or longer time. This written promise is issued by a debtor or, a borrower to the lender or, creditor. Notes receivable is an asset of a business.

Record the sale of machinery on January 1, 2019.

Date	Account Title and Explanation	Debit	Credit
January 1, 2019	Notes receivable	$180,000.00
	Accumulated depreciation (3)	$42,000.00
	Gain on sale of machinery (2)		$31,211.12
	Discount on notes receivable (1)		$30,788.88
	Machinery		$160,000.00
	(To record the gain on sale of machinery and  the machinery is sold on note)

Table (1)

Working note (1):

Calculate the amount of discount on notes receivable.

$\begin{array}{c}\text{Discount on notes receivable=}\left[\begin{array}{l}\text{Notes receivable}-\text{Fair value}\\ \text{machinery on January 1, 2019}\end{array}\right]\\ =\$180,000-\$149,211.12\\ =\$30,788.88\end{array}$

Working note (2):

Calculate the amount of gain on sale of land.

$\begin{array}{c}\text{Gain on sale of land = Fair market value on the date of sale}-\text{Cost of land}\\ =\$149,211.12-\$118,000\\ =\$31,211.12\end{array}$

Working note (3):

Calculate the amount of accumulated depreciation.

$\begin{array}{c}\text{Accumulated depreciation=Cost of machinery}-\text{Current book value}\\ \text{=\$160,000}-\$118,000\\ =\$42,000\end{array}$

Record the interest income earned on note receivable and the collection of note receivable for the year ended December 31, 2019.

Date	Account Title and Explanation	Debit	Credit
December 31, 2019	Cash	$60,000.00
	Discount on notes receivable	$14,921.11
	Interest income (5)		$14,921.11
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of first instalment)

Table (2)

Working note (4):

Calculate the amount of interest rate.

$\begin{array}{c}\text{Present value of machinery=Annual installment }\times \text{Present value of ordinary annuity}\\ \text{\$149,211}\text{.12=\$60,000}\times {\text{p}}_{\text{On=3,i=?}}\\ \$\text{149,211}\text{.12=\$60,000}\times \text{Factor}\\ \text{Factor=}2.486852\end{array}$

Working note (5):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income = Present vale of the machinery sold }\times \text{interest rate}\\ \text{=\$149,211}\text{.12}\times \text{10\%}\\ \text{=\$14,921}\text{.11}\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2020.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Cash	$60,000.00
	Discount on notes receivable	$10,413.22
	Interest income (6)		$10,413.22
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of second instalment)

Table (3)

Working note (6):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the machinery +interest}\\ \text{income earned on December 31, 2016}-\\ \text{Collection of first installment}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$149,211}\text{.12+\$14,921}\text{.11}-\$60,000\right]\times \text{10\%}\\ \text{=\$10,413}\text{.22}\end{array}$

Record the interest income earned on note receivable for the year ended December 31, 2021.

Date	Account Title and Explanation	Debit	Credit
December 31, 2020	Cash	$60,000.00
	Discount on notes receivable	$5,454.55
	Interest income (7)		$5,454.55
	Notes receivable		$60,000.00
	(To record the earnings of interest income on non-bearing-interest note and the collection of second instalment)

Table (4)

Working note (7):

Calculate the amount of interest income.

$\begin{array}{c}\text{Interest income =}\left[\begin{array}{l}\text{ Present vale of the machinery +interest}\\ \text{income earned on December 31, 2016+}\\ \text{interest income earned on December 31, 2017}-\\ \text{Collection of first and second installment}\end{array}\right]\times \text{interest rate}\\ \text{=}\left[\text{\$149,211}\text{.12+\$14,921}\text{.11+\$10,413}\text{.22}-\$120,000\right]\times \text{10\%}\\ \text{=\$5,454}\text{.55}\end{array}$

To determine

Prepare the notes receivable portion of Company L’s balance sheet on December 31, 2019 and 2020.

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 L’s balance sheet on December 31, 2019 and 2020.

Balance sheet (Partial)
As at December 31
Assets	December 31, 2019	December 31, 2020
Notes receivable	$120,000.00 (8)	$60,000.00 (10)
Less: Discount on notes receivable	($15,867.77) (9)	($5,454.55) (11)
Total notes receivable	$104,132.23	$54,545.45

Table (5)

Working notes (8):

Determine the amount of notes receivable at December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2019}\end{array}\}\text{=}\left[\begin{array}{l}\text{Notes receivable at January 1, 2019}-\text{Collection}\\ \text{of notes receivable at December 31, 2019}\end{array}\right]\\ =\$180,000-\$60,000\\ =\$120,000\end{array}$

Working notes (9):

Determine the amount of discount on notes receivable at December 31, 2019.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2019}\end{array}\}=\left[\begin{array}{l}\text{Discount on notes receivable at January 1, 2019}-\\ \text{Interest income recognized at December 31, 2019}\end{array}\right]\\ =\$30,788.88-\$14,921.11\\ =\$15,867.77\end{array}$

Working notes (10):

Determine the amount of notes receivable at December 31, 2020.

$\begin{array}{c}\begin{array}{l}\text{Notes receivable}\\ \text{at December 31, 2020}\end{array}\}\text{=}\left[\begin{array}{l}\text{Notes receivable at December 31, 2019}-\text{Collection}\\ \text{of notes receivable at December 31, 2020}\end{array}\right]\\ =\$120,000-\$60,000\\ =\$60,000\end{array}$

Working notes (11):

Determine the amount of discount on notes receivable at December 31, 2020.

$\begin{array}{c}\begin{array}{l}\text{Discount on notes receivable}\\ \text{at December 31, 2020}\end{array}\}=\left[\begin{array}{l}\text{Discount on notes receivable at December 31, 2019}-\\ \text{Interest income recognized at December 31, 2020}\end{array}\right]\\ =\$15,867.77-\$10,413.22\\ =\$5,454.55\end{array}$