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