Method of amortizing any premium or discount


Problem: On January 1, 2005, Company X sold land that originally cost $400,000 to Company B. As payment, Company B gave Company X $600,000 note. The note bears an interest rate of 4% and is to be paid in three annual installments of $200,000 (plus interest on the outstanding balance). The first payment is due on December 31, 2005. The market price of the land is not reliably determinable. The prevailing rate of interest for notes of this type is 14%.

Prepare the entries required on Company's X books to record the land sale and the receipt of each of the three payments. Use effective-interest method of amortizing any premium or discount on the note.

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Finance Basics: Method of amortizing any premium or discount
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