On January 1, 2013, Worthylake Company sold used machinery to Brown Company, accepting a $25,000 non-interest-bearing note maturing on January 1, 2015. Worthylake carried the machinery on its books at a cost of $22,000 and a current book value of $15,000. Neither the fair value of the machinery nor the note was determinable at the time of sale; however, Brown's incremental borrowing rate was 12%.

Required:

Prepare the journal entries on Worthylake's books to record:

1. Sale of the machinery

2. Related adjusting entries on December 31, 2013, and 2014

3. Payment of the note by Brown on January 1, 2015