Question

On February 1, 2021, Stealth Trucks sold a diesel rig to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity, and the 10% interest rate reflected the market rate of interest at the time of sale. On August 1, 2021, Kansas Transports discounted the note without recourse at the First South Bank at 12% interest. Required: Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note

Answer 1

Note receivable = $200,000
Interest on maturity = $200,000 * 10% = $20,000
Discount on note = ($200,000 + $20,000) * 12% * 6/12 = $13,200
Cash receivable = ($200,000 + $20,000) - $13,200 = $206,800

Account Titles Debit Credit Interest receivable 10,000.00 $ 10,000.00 Interest revenue (Recognise interest revenue) ($200,000 * 10% * 6/12-$10,000) Cash $ 206,800.00 3,200.00 Loss on sale of note receivable $ 200,000.00 Note receivable $ 10,000.00 Interest receivable (Discounting of note)