Accounting for a Non-Interest-Bearing Note Zobell Corporation sells equipment with a book value of

QUESTION

Accounting for a Non-Interest-Bearing NoteZobell Corporation sells equipment with a book value of $8,000, receiving a non interest bearing note due in three years with a face amount of $10,000. There is no established market value for the equipment. The interest rate on similar obligations is estimated at 12%. Compute the gain or loss on the sale and the discount on notes receivable, and make the necessary entry to record the sale. Also, make the entries to record the amortization of the discount at the end of the first, second, and third year using effective-interest amortization.(Round to the nearest dollar.)
Present value of note = Vale of note / (1+i)^n = 10000/(1+.12)^3 = 7118 Loss on equipment sale = Book value Present value of note = 8000 7118 = 882 Journal entries: Date Particulars Amount (Dr) Amount (Cr) 1-jan-x1 Notes receivable 7,118 Loss on equipment sale 882 Equipment 8,000 31-dec-x1

otes receivable 854 Interest income 854 (7118*.12) 31-dec-x2 Notes receivable 957 Interest income 957 (7118+854)*.12 31-dec-x3 Notes receivable 1,071 Interest income 1,071 (10000 7118 854 957)

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