On January 1, 2013, Pitt Company sold a patent to Chatham Inc. which had a carrying value on Pitt's books of $10,000. Chatham gave Pitt a $60,000 non-interest-bearing note payable in 5 equal annual installments of $12,000 with the first payment due and paid on January 1, 2014. There was no established price for the patent, and the note has no ready market value. The prevailing rate of interest for a note of this type at January 1, 2013, is 12%.

Required:

1. Prepare a schedule showing the income or loss before income taxes that Pitt should record for the years ended December 31, 2013 and 2014. Show supporting computations in good form.

2. Next Level If Pitt inadvertently failed to discount the note and instead recorded it at its gross value, what would be the effect on income or loss before income taxes for the year ended December 31, 2013?