Monthly Notes Receivable Not Issued at Face Value

[cpcruz]

Hi everyone,

This problem has been bothering me the past couple days and when I find examples online, the examples are shown with years, not months. Below is the problem:

On April 1, 2014, Lee Custom Products sold a specialized cutting machine to Alvarez Associated, at total cost of $10,000,000. Lee agreed to accept an 11-month, 2% note with interest due on its maturity date, March 1, 2015. Lee’s year-end is December 31st. The stated interest rate of 2% is not reasonable when compared to the going market rate of interest of 9% for similar financing arrangements.


*Prepare the journal entries to record the following events:

The sale of the machine on April 1, 2014
*The year-end interest accrual on December 31, 2014
*The collection of the note receivable on its maturity date of March 1, 2015


I would highly appreciate a breakdown of the numbers if possible. Thank you very much

 

[Ameen Ahmed]

you should create a financial asset of 10,000,000 first against machine...
then...
year end interst accural will be (900000-200000) = 700000*(11/12)= $641667 this will be added to the note of $10,000,000 to give your amount of collection on maturity date