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General Accounting Discussions: Sale of Asset For A Long Term Note Receivable

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  1.  
    • CommentAuthorMkultra
    • CommentTimeMar 11th 2008
     
    Company A owns stock in Company B worth $5,100,000. Company A then sells this stock it owns for a 5 year (non interest bearing) note receivable for 8,000,000 assume market interest rates are 15%. The company originally booked a gain of 2,900,000 at the time of the sale.
    This was their journal entry for the sale
    Note receivable 8,000,000
    Shareholdings 5,100,000
    Revenue 2,900,000

    This is incorrect because long term receivables are carried at their net present value. The PV of $8 mil 5 years from now at an interest rate of 15% is $3,977,414. what is the correct journal entries for this sale???
    Thanks
  2.  
    your right the original entry made was wrong, there should no revenue to be recorded because the selling price of investment in stock sold was not $8,000,000.00 but rather $4,022,586 ($8,000,000.00-3,977,414), therefore gain should be recorded as follows:

    selling price 4,022,586.00
    cost of investment sold 5,100,000.00
    loss on sale 1,077,414.00

    the correct entry should be

    Notes receivable 8,000,000.00
    Loss on sale 1,077,414.00
    Discount on notes receivable 3,977,414.00
    Investment in stock 5,100,000.00

    The discount will gradually be amortized to interest revenue over 5 years.
    • CommentAuthorMkultra
    • CommentTimeMar 13th 2008
     
    Thanks yep thats what i thought i just forgot the loss on sale entry

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