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Note Receivable with No Interest Stated Rate

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.

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.