On December 31, Richland Farms sold a tract of land, which had cost $930,000, to Skyline Developers
On December 31, Richland Farms sold a tract of land, which had cost $930,000, to Skyline Developers in exchange for $150,000 cash and a five-year, 4 percent note receivable for $900,000. Interest on the note is payable annually, and the principal amount is due in five years. The accountant for Richland Farms did not notice the unrealistically low interest rate on the note and made the following entry on December 31 to record this sale.
a. Compute the present value of the note receivable from Skyline Developers at the date of sale, assuming that a realistic rate of interest for this transaction is 12 percent.
b. Prepare the journal entry on December 31 to record the sale of the land correctly. Show supporting computations for the gain or loss on the sale.
c. Explain what effects the error made by Richland Farmsâ€™s accountant will have on
(1) The net income in the year of the sale and
(2) The combined net income of the next five years. Ignore incometaxes.
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