Question

10. Carr Castle Co, borrowed $40,000 by issuing a four-year non-interest-bearing note to a customer. In addition, Carr Castle agreed to sell inventory to the same customer at reduced prices over the four-year period. Carr Castle's incremental borrowing rate was 8%, so the present value of the note was $29,400. The customer agreed to purchase an equal amount of inventory each year over the four-year period. Required: Prepare journal entries to: a. Issue the note b. Adjust at the end of the first year c. Adjust at the end of the second year

Answer 1

Discount rate Year-4 0.7350 PV Value factor Present value of Note Note issue price Total discount payable on note payable 8% Year-1 Year-2 Year-3 0.9259 0.8573 0.7938 29,401 ($ 40,000*0.7350 40,000 B 10,599 |C=B-A $ $ $ Year-1 2,650 Year-2 $ 2,650 Year-3 $ 2,650 Year-4 $ 2,650 Amortization of discount and unearned revenue $ Date Credit Debit $ 40,000 $ 10,599 Accounts tittle and explination Cash Discount payable on note payable Note payable Unearned sales revenue (To record an exchange of note for cash and discount on goods) $ 40,000 $ 10,599 $ 2,650 Interest expense Discount payable on note payable (To record amorization of interest expense) $ 2,650 $ 2,650 Unearned sales revenue Sales revenue (To record revenue earned) $ 2,650 $ 2,650 Interest expense Discount payable on note payable (To record amorization of interest expense) $ 2,650 2,650 Unearned sales revenue Sales revenue (To record revenue earned) $ 2,650