On December 31, 2015 the Neptune Corporation acquired acustom-made plant asset by issuing a promissory note with a face value of $ 1,200,000, a due date of December 31, 2025 and a stated (coupon) rate of interest of 4%.
Interest is compounded annually and is payable at the end on each year. The fair value of the customized asset is not readily determinable and the note receivable is not publicly traded. Given the company's incremental borrowing rate and current market conditions, the imputed rate of interest for the note is estimated as 7%.
Determine the present value of the note and prepare the journal entry to record the transaction for Neptune Corporation.