Question

On June 30, 2021, the Esquire Company sold merchandise to a customer and accepted a noninterest-bearing note in exchange. The note requires payment of $28,000 on March 31, 2022. The fair value of the merchandise exchanged is $26,530. Esquire views the financing component of this contract as significant. 

Required:

 1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any December 31, 2021 interest accrual, and the March 31, 2022 collection.

 2. What is the effective interest rate on the note?

Answer 1

Answer
1)
Date	Account title	Debit	credit
June 30 2021	Note receivable	$     28,000
	Discount on note receivable		$       1,470
	sales revenue		$     26,530
December 31 2021	Discount on note receivable	$          980
	Interest revenue (1470*6/9 )		$          980
march 31 2022	Discount on note receivable	$          490
	Interest revenue (1470-980)		$          490
March 31 2022	cash	$     28,000
	Note receivable		$     28,000
2)Discount amount = Face value of note *r *n/12
1470 = 28000* r *9/12
1470/28000 = r*9/12
.0525*12/9 = r
r = .07 or 7%

Answer 2

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Debit Credit 265301 Answer Part1) Journal Entry Date Account Title June 30,2021. Note Receivable Sales (To record sale of goods) December 31, 2021. Note receivable ((28000-26530)*6/9) Interest revenue (To record interest revenue) 26530 980 3 March 31,2022 28000 Cash Note receivable Interest revenue (28000-26530)*3/9) (To record collection of note) 27510 490 3 Part 2) Effective interest rate on the bond = (Face Value -Sale )/Sales*12/9*100 = (28000-26530)/26530*12/9*100 2 = 7.39 % Thus the correct answer is 7.39%