Question

Frank Ricard Inc. sells inventory on January 1st 2020 in exchange for a $2,000 note, due in 2 years (i.e., zero interest bearing). The effective interest rate for this note is 10 percent

Prepare all journal entries related to note and any related interest from January 1st, through the repayment on January 1st 2022.

Answer 1

Note - Since the Note Receivable does not bear any interest, no entry for interest income is made. The effective interest rate is 10%. This rate specifies that the inflation effect will be given to the note Receivable.

Journal Entries Date 2020 Debit Credit Thuary Note $2000 Receivable Sales issue of Notes Receivable $ 2000 (For 200 L dodle January 1 १२५२० २५२ Cash / Bank o To Notes Receivable C Amount received on Notes Receivable Cofdceo X 1.10X1.10

So, when payment is made to the company, the inflated value will be received by the company. Accordingly, 10% increase is made for two years as note is due in 2 years.

Alternatively, inflation can be adjusted in different manner. Say, that, due to inflation, less amount is received. So the amount can be -

$2000 / 1.10 × 1.10

= $1152 in 2022.