On July 1, 2020, Buffalo Inc. made two sales. 1. It sold land having a fair value of $904,290 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,422,914. The land is carried on Buffalo's books at a cost of $591,300.
2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $408,830 (interest payable annually).

Buffalo 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.

Required:
Record the two journal entries that should be recorded by Vaughn Inc. for the sales transactions above that took place on July 1, 2020.

Journal 1

July 1

Note Receivable $1,422,914 (debit)

Profit and Loss $851,614 (credit)

Land $591,300 (credit)

Sale of land on credit

Journal 2

July 1

Note Receivable $861,394 (debit)

Service Revenue $861,394 (credit)

Rendered Services on credit

Explanation:

Journal 1

Sale of land on credit :

De-recognise the Land in Buffalo Inc. books at cost, Recognise the Assets of Note Receivable and a Profit from sale. Proceeds are measured at the future value

Future Value :

PV = $1,422,914

n = 4

pmt = $0

p/yr = 1

fv = ?

Using a financial calculator the future value is $1,422,914.

Journal 2

Rendered Services on credit :

Recognize the Assets of Note Receivable and Recognise the Revenue at the future value.

Future Value :

pv = - $408,830

n = 8

pmt = 3% × $408,830 = $12,264.90

i = 12%

p/yr = 1

fv = ?

Using a financial calculator, the future value is $861,394

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