Notes Receivable and Income
Response to the following problem:
On January 1, 2010, the 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 five equal annual installments of $12,000, with the first payment due and paid on January 1, 2011. 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, 2010 is 12%. Information on present value and future amount factors is as follows:
|
|
Period
|
|
|
1
|
2
|
3
|
4
|
5
|
|
Present value of $I at 12%
|
0.89
|
0.80
|
0.71
|
0.64
|
0.57
|
|
Present value of an annuity of $1 at 12%
|
0.89
|
1.69
|
2.40
|
3.04
|
3.60
|
|
Future amount of $1 at 12%
|
1.12
|
1.25
|
1.40
|
1.57
|
1.76
|
|
Future amount of an annuity of $1 at 12%
|
1.00
|
2.12
|
3.37
|
4.78
|
6.35
|
Required
Prepare a schedule showing the income or loss before income taxes (rounded to the nearest dollar) that Pitt should record for the years ended December 31, 2010 and 2011, as a result of the preceding facts. Show supporting computations in good form.