Description
On December 31st, 2014 Abbey Co performed serices for Hardwick Co. Hardwick was short of cash and Abbey Co agreed to accept a $200,000 zero interest bearing note, due December 31, 2016, as payment in full. Hardwick is somewhat of a credit risk and borrows funds at a rate of 10%. Abbey is more credit worth and have various credit lines at 6%
1-prepare journal entry for transaction on December 31,2014 for Abbey Co
2- Assuming the fiscal year ends on 12/31, prepare journal entry for 12/31/15
Explanation & Answer
This must be discounted to show the present value of the note. It's discounted at 10% because that's the required rate, and there are 2 periods.
Debit note receivable 165,289
Credit revenue 165,289
At the end of the next year 1 year of interest revenue is earned.
Debit note rec 16,529
Credit int rev 16,529