On January 1, 2011, Rapid River Realty sold a tract of land to three doctors as an investment. The land, purchased 10 years ago, was carried on Rapid River’s books at a value of $210,000. Rapid River received a non-interest-bearing note for $275,000 from

1. The journal entry to record the sale of land on Rapid River's books would be: Cash $275,000 Land $210,000 Discount on Note $30,405 Gain on Sale $94,595 Explanation: Rapid River Realty is selling a tract of land to three doctors for $275,000. Since the land has been carried on the books at a value of $210,000, there is a gain on the sale of $94,595. However, because the note has no stated interest rate, it must be discounted at market rate (11%) to determine its present value. This creates a discount on the note of $30,405. 2. The schedule of discount amortization for the note would be: Year 1: $30,405 x 11% = $3,345 Year 2: $30,405 x 11% = $3,345 Total Interest Expense = $6,690 Year 1: Interest Income $3,345 Discount on Note $2,305 Cash $1,040 Year 2: Interest Income $3,345 Discount on Note $3,131 Cash $214 Explanation: The schedule of discount amortization determines how the discount on the note will be amortized over its life. Since the note is due in two years, there will be two periods of discount amortization. The interest expense for each year is calculated as the discount on the note ($30,405) multiplied by the market interest rate (11%). The interest income and discount on note accounts are adjusted accordingly, and the remaining cash received is recorded. 3. The adjusting entries to be made at the end of 2011 and 2012 to record the effective interest earned would be: End of Year 1: Interest Income $3,345 Discount on Note $2,305 Interest Receivable $1,040 End of Year 2: Interest Income $3,345 Discount on Note $4,436 Interest Receivable $1,214 Gain on Sale $94,595 Explanation: The adjusting entries are made to reflect the effective interest earned on the note. At the end of each year, the interest income and discount on note accounts are adjusted based on the actual interest earned (11% of the carrying value of the note). The interest receivable account is used to record the interest income that has not yet been received in cash. At the end of the note's term, the remaining discount on the note is combined with the final interest payment to equal the face value of the note ($275,000), resulting in a gain on sale of $94,595.