Problem 7-8 On October 1, 2014, Arden Farm Equipment Company sold a pecan-harves
ID: 2459904 • Letter: P
Question
Problem 7-8
On October 1, 2014, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $122,000, 10% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year basis.
Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.(Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
(To record the collection of interest)
(To record the collection of the note)
Date
Account Titles and Explanation
Debit
Credit
10/1/1412/31/1410/1/1512/31/1510/1/16
10/1/1412/31/1410/1/1512/31/1510/1/16
10/1/1412/31/1410/1/1512/31/1510/1/16
10/1/1412/31/1410/1/1512/31/1510/1/16
10/1/1412/31/1410/1/1512/31/1510/1/16
(To record the collection of interest)
(To record the collection of the note)
Explanation / Answer
Journal entries for Arden Farm Equipment Company for the entire term of the note.
Notice that there is NO DISCOUNT ACCOUNT because for a note with a REALISTIC interest, Future value = Present value.
In this example, we can easily verify that PV(122,000,10%.2)+PV(12200,10%,1)+PV(12200,10%,2) = 122,000
Date Account Titles and Explanation Debit $ Credit $ 10/01/2014 Notes Receivable Dr. 122,000 Sales revenue Cr. 122,000 12/31/2014 Interest Receivable Dr. 3,050 Interest Revenue Cr. 3,050 ($122,000*3/12*10/100=$3050) 10/01/2015 Cash Dr. 12,200 Interest Receivable Cr. 3,050 Interest Revenue Cr. 9,150 ($122,000*9/12*10/100=$9150) 12/31/2015 Interest Receivable Dr. 3,050 Interest Revenue Cr. 3,050 ($122,000*3/12*10/100=$3050) 10/01/2016 Cash Dr. 134,200 Notes Receivable Cr. 122,000 Interest Receivable Cr. 3,050 Interest Revenue Cr. 9,150