Question

On July 1, 2020, Cheyenne Inc. made two sales.

1.		It sold land having a fair value of $909,890 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,431,725. The land is carried on Cheyenne's books at a cost of $594,900.
2.		It rendered services in exchange for a 3%, 8-year promissory note having a face value of $409,660 (interest payable annually).

Cheyenne Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

Record the two journal entries that should be recorded by Cheyenne Inc. for the sales transactions above that took place on July 1, 2020. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. 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.)

Answer 1

Date	Particulars	Debit	Credit
July 1 2020	Notes Receivable	$ 1,431,725
	Land		$ 594,900
	Gain on sale (909890-594900)		$ 314,990
	Discount on notes receivable (1431725 – 594900-314990) or ( 1431725 – 909890)		$ 521,835
	(To record the sale of land)
July 1 2020	Notes Receivable	$ 409,660
	Discount on notes receivable		$ 183,513
	Service revenue		$ 226,507
	(To record the service revenue)

Working notes:

Year	Cash Flows	PV Factor @ 12%	PV of cash flows
	A	B	A*B
1	409660*3% = 12290	(1/1.12)^1 = 0.89286	$               10,973
2	12290	0.79719	$                   9,798
3	12290	0.71178	$                 8,748
4	12290	0.63552	$                  7,811
5	12290	0.56743	$                  6,974
6	12290	0.50663	$                  6,226
7	12290	0.45235	$                   5,559
8	12290	0.40388	$                   4,964
8	409660	0.40388	$               165,455
	Service Revenue		$               226,507
	Notes Receivable		$               409,660
	Discount (409660-226507)		$               183,153

Explanations:

1. The land is recorded at historical cost. It is sold here at fair value for exchange of promissory note which has a higher value in proportion to fair value. The difference between fair value and cost would be the gain and the difference between fair value and the value of the promissory note would be the discount offered by noteholders.
2. The discount rate applied is the rate at which the customer can borrow, hence, 12%. The face value has to be divided into two parts of service revenue and the discount offered which is computed in working notes

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