Question:
On January 1, 2013, the Apex Company exchanged some shares of common stock it had been holding as
an investment for a note receivable. The note principal plus interest is due on January 1, 2014. The 2013
income statement reported $2,200 in interest revenue from this note and a $6,000 gain on sale of
investment in stock.
The stock’s book value was $16,000. The company’s fiscal year ends on December 31.
Required:
1. What is the note’s effective interest rate?
2. Reconstruct the journal entries to record the sale of the stock on January 1, 2013, and the adjusting
entry to record interest revenue at the end of 2013. The company records adjusting entries only at year-
end.
Answer:
Requirement 1
Book value of stock $16,000
Plus gain on sale of stock 6,000
= Note receivable $22,000
Interest reported for the year $ 2,200
= 10% rate
Divided by value of note $ 22,000
Requirement 2
To record sale of stock in exchange for note receivable:
On January 1, 2013, the Apex Company exchanged some shares of common stock it had been holding as
an investment for a note receivable. The note principal plus interest is due on January 1, 2014. The 2013
income statement reported $2,200 in interest revenue from this note and a $6,000 gain on sale of
investment in stock.
The stock’s book value was $16,000. The company’s fiscal year ends on December 31.
Required:
1. What is the note’s effective interest rate?
2. Reconstruct the journal entries to record the sale of the stock on January 1, 2013, and the adjusting
entry to record interest revenue at the end of 2013. The company records adjusting entries only at year-
end.
Answer:
Requirement 1
Book value of stock $16,000
Plus gain on sale of stock 6,000
= Note receivable $22,000
Interest reported for the year $ 2,200
= 10% rate
Divided by value of note $ 22,000
Requirement 2
To record sale of stock in exchange for note receivable:
