Q:

On December 31, 2011, Hurly Co. performed environmental consulting services for Cascade Co.
Cascade was short of cash, and Hurly Co. agreed to accept a $300,000 zero-interest-bearing note
due December 31, 2013, as payment in full. Cascade is somewhat of a credit risk and typically
borrows funds at a rate of 10%. Hurly is much more creditworthy and has various lines of credit
at 6%.
Instructions
(a) Prepare the journal entry to record the transaction of December 31, 2011, for the Hurly Co.
(b) Assuming Hurly Co.’s fiscal year-end is December 31, prepare the journal entry for
December 31, 2012.
(c) Assuming Hurly Co.’s fiscal year-end is December 31, prepare the journal entry for
December 31, 2013.
(d) Assume that Hurly Co. elects the fair value option for this note. Prepare the journal entry at
December 31, 2012, if the fair value of the note is $295,000.

A:

(a) Notes Receivable .........................................................................

300,000
Discount on Notes Receivable............................................ 52,065
Service Revenue ................................................................ 247,935*

*Computation of present value of note:

PV of $300,000 due in 2 years at 10%
$300,000 X .82645 = $247,935

(b) Discount on Notes Receivable......................................................

24,794
Interest Revenue ................................................................ 24,794*
 *$247,935 X 10% = $24,794

(c) Discount on Notes Receivable......................................................

27,271*
Interest Revenue................................................................. 27,271

*$52,065 – $24,794

Cash..............................................................................................
300,000
Notes Receivable ............................................................... 300,000

(d) Notes Receivable..........................................................................

22,271
Unrealized Holding Gain or
Loss—Income................................................................. 22,271*

*Note Receivable, net................................................. $247,935

Amortization, 12/31/12.......................................... 24,794
Book Value, 12/31/12............................................... 272,729

Fair Value.................................................................. $295,000

Carrying Value.......................................................... (272,729)
Unrealized Gain........................................................ $ 22,271
a) Bad Debt Expense Dr. $5,350 Cr. blank
Allowance for Doubtful Accounts
Dr. blank Cr $5,350

b) Bad Debt Expense Dr. $2,800 Cr. blank

Allowance for Doubtful Accounts
Dr. blank Cr $2,800

Solution:
(a) Allowance for Doubtful Accounts = ($90,000 × 4%) + $1,750 = $5,350

(b) Allowance for Doubtful Accounts = [($90,000 x 5%) - $1,700] = $2,800

Chung, Inc
Cash ...................................
......................................
.
730,000
Finance Charge
(¥1,000,000 X 2%)
........................
20,000
Notes Payable
............................................
....
750,000

Seneca National Bank

Notes Receivable
............................................
........
750,000
Cash
............................................
....................
730,000
 Financing Revenue
(¥1,000,000 X 2%) .........
20,000
BE7.10
Chung, Inc
Cash .........................................................................
.
730,000

Finance Charge (¥1,000,000 X 2%) ........................

20,000

Notes Payable ................................................

750,000

Seneca National Bank

Notes Receivable ....................................................

750,000

Cash ................................................................
730,000
Financing Revenue (¥1,000,000 X 2%) .........

20,000

7-30
Copyright © 2014 John Wiley & Sons, Inc.
Kieso, IFRS, 2/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 7-14
(Continued)
(c)
Notes Payable
............................................
.....
300,000
Interest Expense
............................................
.
7,500*
Cash
............................................
............
307,500
 *10% X $300,000 X 3/12
= $7,500