Question 1 (20 marks)

On May 31, 2022, Ace Tractor Company sold a tractor to Joker Excavating in exchange for a 2-year, $500,000, non-interest-bearing note. Joker Excavating will make a $300,000 payment on May 31, 2023 and pay a lump-sum payment of 200,000 on May 31, 2024. Year end is December 31.

Assume that your year-end adjusting entries are reversed. Do not show the reversal entry. If you do not know what a reversing journal entry is, it is important that you find out before completing this question. Joker Excavating would normally pay an interest rate of 8%.

Required

Prepare all journal entries required for the note for the seller, Ace Tractor, from the initial sale to repayment. Count exact days for the year-end interest revenue adjustment. Calculate and journalize final amounts to the nearest dollar. Note that using the cash flow keys on your financial calculator is the easiest way to calculate the present value of this note. (20 marks)

Question 2 (25 marks)

On September 17, 2022, AAA Security sold an alarm system to Wondermart in exchange for a 2-year, $600,000 note bearing market interest at 7%. Wondermart will repay the note in two equal payments. AAA Security follows IFRS and therefore uses the effective interest method. AAA Security does not use reversing entries.AAA Security has a December 31 Year end.

Required

Calculate the payment. Prepare all journal entries required for the note for AAA Security, from the initial sale to full repayment. Count exact days for the year-end interest revenue adjustment. Round amounts to the nearest dollar. (25 marks)