Purpose: This exercise will illustrate the accounting for a situation involving the exchange of a noncash asset or service for a promissory note where the fair value of the asset or service is not known.
Fairmont Company's annual accounting period ends on December 31. On July 1, 2014, Fairmont Company rendered services in exchange for a 3%, 8-year promissory note having a face value of $300,000 with interest payable annually. Fairmont Company recently had to pay 8% interest for money that it borrowed from Arizona National Bank. The customer in this transaction has a credit rating that requires them to borrow money at 12% interest.
Instructions
(a) Prepare the journal entry that should be recorded by Fairmont Company for the sale of the services in exchange for the note.
(b) Prepare the amortization schedule for the note receivable accepted in the transaction.
(c) Prepare the necessary journal entries at December 31, 2014, June 30, 2015, and December 31, 2015 that relate to the note receivable. Assume the customer makes the scheduled interest payments on time. Also, assume amortization is recorded only at year-end. Fairmont does not use reversing entries.