Question

On January 1, 2020, Jacobs Company sells land financed through an $80,000 note, issued by Andress Company. The note is an $80,000, 8%, annual interest-bearing note. Andress agrees to repay the $80,000 proceeds on December 31, 2021. The prevailing interest rate on similar notes is 11%. Assume that the cost of the land is equal to the fair value of the note.

Required:
Prepare all entries for Jacobs over the note term, including any year-end adjustments. Use the effective interest method to amortize the discount.

Answer 1

Entries are shown below.

Step-by-step explanation:

To record the journal entries, we first need to calculate interest payment and principal as per the present value. This is done below:

PV Factor Present Value

Interest Payment $6,400 1.7125 $10,960

Principal $80,000 0.8116 $64,928

$75,888

Journal Entries

Date Particular Debit ($) Credit ($) Working

Jan 1, 2020 Note Receivable 80,000

Discount on Receivable 4,112

Land 75,888

Dec 31, 2020 Cash 6,400

Discount on Receivable 1,948 (8348-6400)

Interest Revenue 8,348 (75888*11%)

Dec 31, 2021 Cash 6,400

Discount on Receivable 2,162 (4279-3600)

Interest Revenue 8,562

(75888+1,948)*11%

Dec 31, 2021 Cash 80,000

Notes Receivable 80,000