EXERCISE 7-18

Retoul Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.

On July 1, 2010, Rentoul Inc. made two sales.

1. If rendered services in exchange for a 5%, 8-year promissory note having a face value of $400,000 (interest payable annually).

2. It sold land having a fair market value of $900,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,416,163. The land is carried on Rentoul's books at a cost of $590,000.

Instructions:

Record the two journal entries that should be recorded by Rentoul Inc. for the sales transactions above that took place on July 1, 2010.

1.

7/1/10

Notes Receivable

400,000.00

Discount on Notes Receivable

139,095.2

Service Revenue

260,904.8

Computation of the present value of the note:

Maturity value

$400,000.00

Present value of $400,000 due in

8 years at 12%$400,000 X .40388

$161,552.00

Present value of $20,000

payable annually for 8 years at

12% annually$20,000 X 4.96764

99,352.8

Present value of the note

260,904.8

Discount on notes receivable

$139,095.2

I would like to know where the $20,000 figure came from.