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    Note Receivable with No Interest Stated Rate

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    On December 31, 2005 Ed Abbey Co performed environmental consulting services for Hayduke Co.
    Hayduke was short of cash and Abbey Co agreed to accept a $200,000 zero interest bearing note due December 31, 2007, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more credit worthy and has various lines of credit at 6%.

    A.) Prepare the journal entry to record the transaction of December 31, 2005, for the Ed Abbey Co.

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    Solution Preview

    Because this transaction is a long term note, the time value of money must be considered. That means interest (or finance charges). A stated interest rate on a note is presumed to be reasonable and an arm's length transaction unless:

    1. No interest is stated
    2. The stated rate is ...

    Solution Summary

    The solution examines the issues, selects a position with explanation and presents the journal entry to record the transaction.