Question

Arctic Cat sold Seneca Motor Sports a shipment of snowmobiles. The snowmobiles were delivered on January 1, 2021, and Arctic received a note from Seneca indicating that Seneca will pay Arctic $40,400 on a future date. Unless informed otherwise, assume that Arctic views the time value of money component of this arrangement to be significant and that the relevant interest rate is 7%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Assume the note indicates that Seneca is to pay Arctic the $40,400 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021. 2. Assume the same facts as in requirement 1, and prepare the journal entry for Arctic to record collection of the payment on December 31, 2021. 3. Assume instead that Seneca is to pay Arctic the $40,400 due on the note on December 31, 2022. Prepare the journal entry for Arctic to record the sale on January 1, 2021. 4. Assume instead that Arctic does not view the time value of money component of this arrangement to be significant, and that the note indicates that Seneca is to pay Arctic the $40,400 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.

Answer 1

Ansur: - Page - .: Sale date = January 1, 2021 . Notes recevble amount = $40,000 ata future dale .. interest are discount rate for present value of note) = 87. Ⓡ. if note is due on December 31, 202) Present value of note using or table of $7 at 84. - $40,000 * 0.9259 - $37036, " The cost Principle and revenue principle reawie that tɣansaction be recorded at thier cash value at the time of transaction, since, $ 40,000 is to be received in the future, we need to determine the Present Value of such future amount to be recorded in booke whitch is $ 37036 using discout factor 8%. Soat the time of sale, a portion of this note re Precent revennuy earned and Pas tion de present implict interest Cor disout factor) based on time value of money. So we recored our asset Notes Decevible as debit we credit the Sails revenus, not interest on not currenty Since it is not yet earned, it will be Carned during the duration of the cs cnotes) WWW

Page 2 Ansuri- -> Journal, entry on January 1, 2021 -> Note receivble Dr. $ 40,000 .-) To sales revenues $ 37,036. 2 Journal entry at the time of colloction of note: -) Discount on notes receivble Dr. $2962 3) to interest Revenue $ 2964 3) To above entry is for interelt accrudon . note =). cash Ale Dr. $ 40,000 TO Note recevible $ 40,000 => the above entry is to record collati on of note on due date S . Note is due on December 31, 2022 => Son=2 years i = 89. Pv factor of si @8% for 2 years = 0.8573 => So, present Value of note = $40,000 * 0.8573 = $34292 - Journal entry at the time of sale. on Janaury 2021 Note recerble Dr. $ 40,000 Scanned with CamScanner

3) of To discount on note recevible $5708 Page 3 =) To Sale revenue $34,292 i in the above entry, we have calcileted the Present Value of the note useing. Pr table $ 34292 is the present Value and reprents the revenue earned today. The difference in the value of note and $34292 represents interests that will be earned on the note dureing the 2 year period. ... ©. Man twrity date of note - Dec 31,2021 (with in I year) there fore it is basicilly a current asset like accounts recerible. - Journal entry at the time of sale: => Note recerible $40,000 3) TO Sales revenues $ 40,000 _ *- Scanned with Canscanner