Question

E14-18 (L03) (Imputation of Interest with Right) On January 1, 2017, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions .

(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.) 
 .

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period. 


Answer 1

Dear Student , above question only tricky part is calculation of discount factor m which explained below clearly . Any doubt ,please drop message.

Thank you  

	On Jan1'2017 , Margaret Avery Borrowed and received
	Amount to $- A	4,00,000
	Zero Interest bearing Note due in 3 years
	Loan period - years	3
	The appropriate rate to which to impute Interest	8%
	Need to calculate present Value 8% for 3 years on $400,000
	Present Value $
Year 1	Discount Factor 8% = (1/1.08)----------------	0.93
Year 2	Discount Factor 8% = (Year 1 Factor /1.08)== ( 0.93)/1.08	0.86
Year 3	Discount Factor 8% = (Year 2 Factor /1.08)== ( 0.86)/1.08	0.79
	So Present Value would be - $400,000*0.79-B	3,17,533
	Discount value derived (A-B) = $	82,467
Jan 1'2017	Journal Entries	Debit($)	Credit($)
	Cash	4,00,000
	Discount ( difference of Fiar value - present value ) Note Payable	82,467
	Note Payable		4,00,000
	Unearned revenue		82,467
	( accounted amount borrowed , received , discount and Unearned revenue )
Dec 31'2017	Interst expenses	25,403
	Discount on Note payable		25,403
	( present value *8% = $317533*8%)
	( recorded Interest expenses)
Dec 31'2017	Unearned revenue	27,489
	Discount on Note payable		27,489
	( accounted sales revenue , unwind of unearned revenue)
	Same allocation over 3 years == $ 82467/3)