Question

(Note Transactions at Unrealistic Interest Rates) On July 1, 2017, Agincourt Inc. made two sales.

1. It sold land having a fair value of \(700,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of \)1,101,460. The land is carried on Agincourt’s books at a cost of \(590,000.

2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of \)400,000 (interest payable annually).

Agincourt 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.

Instructions

Record the two journal entries that should be recorded by Agincourt Inc. for the sales transactions above that took place on July 1, 2017.

Short answer

The business entity generates a gain of$110,000 on land sale.

Step-by-step solution

Definition of Fair Value

The fair value of any asset is defined as the price agreed upon by both buyer and seller. This value is not similar to market value.

Journal entry for the sale of land

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Note receivable	$1,101,460
	Discount on note receivable		$401,460
	Land		$590,000
	Gain on sale of land		$110,000

Working note: Calculation of discount

Particular	Amount $
Face value	$1,101,460
Less: Present value of Face value of note $1,101,460 @12% for 4 periods$\left(\$1,101,460\times 0·63552\right)$	($700,000)
Discount	$401,460

Journal entry for service provided

Date	Accounts and Explanation	Debit $	Credit $
1 July 2017	Note receivable	$400,000
	Discount on note receivable		$178,804
	Service revenue		$221,196

Working note: Calculation of discount on note receivable

Particular	Amount
Maturity value	$400,000
Less: Present value of $400,000 for 8year @ 12% $\left(\$400,000\times 0·40389\right)$	(161,556)
Less: Present value of $12,000$\left(\$400,000\times 3\%\right)$ for 8 years @ 12% (PVAF: 4.97)	(59,640)
Discount on note receivable	$178,804