Question

On June 1, 2021, Wildhorse & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $106800, with payment due in 12 months. The fair value of the equipment on the date of sale was $90000. The amount of revenue to be recognized on this transaction in 2021 is

a. $106800.
b. $16800.
c. $90000.
d. $90000 sales revenue and $9800 interest revenue.

Answer 1

d. $90000 sales revenue and $9800 interest revenue.

Step-by-step explanation:

Note will be recorded on the fair value of equipment and the net difference of the zero interest bearing bond and the fair value of he equipment will be recorded as the interest income.

Amount of sale = $90,000

Interest amount = $106,800 - $90,000 = $16,800

As only 7 months have been passed until end of 2021 from the date of sale

only interest of 7 months is recognized.

Interest income recognised in 2021 = $16,800 x 7 /12 = $9,800