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13 October, 14:02

On January 1, 2020, Pina Corporation sold a building that cost $263,240 and that had accumulated depreciation of $101,140 on the date of sale. Pina received as consideration a $253,240 non-interest-bearing note due on January 1, 2023. There was no established exchange price for the building, and the note had no ready market. The prevailing rate of interest for a note of this type on January 1, 2020, was 11%. At what amount should the gain from the sale of the building be reported?

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  1. 13 October, 17:26
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    Gain from sale = $23,067

    Explanation:

    the none interest bearing note must be recorded at present value:

    present value of the note = face value / (1 + r) ⁿ

    face value = $253,240 r = 11% n = 3

    PV = $253,240 / (1 + 11%) ³ = $185,167

    the note receivable must be recorded at $253,240, but $68,073 will be recorded as interest revenue.

    the journal entry for the transaction should be:

    January 1, 2020, sale of a building:

    Dr Notes receivable 253,240

    Dr Accumulated depreciation 101,140

    Cr Building 263,240

    Cr Interest revenue 68,073

    Cr Gain from sale 23,067
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