Question

CORRECT ANSWER NEEDED ASAP THROUGH SPREADSHEET

On December 31, 20x0, you make a large sale of inventory to a customer. You

offered your customer financing terms as follows:

• $300,000 payable on December 31, 20x3

• interest of 1.5% on the $300,000 payable on Dec 31, 20x1, 20x2 and

20x3.

Your incremental borrowing rate is 6% and you estimate that your customer’s

incremental borrowing rate is 8%.

Prepare all journal entries for this transaction for the years ended December 31,

20x0, 20x1 and 20x2.

Answer 1

Year	PV factor @ 6%	Remarks
1	0.94340	= 1 / 1.06
2	0.89000	= 0.9434 / 1.06
3	0.83962	= 0.89 / 1.06
Total	2.67301

	Amount	Multiply: PV factor	Present value
Interest receipts (300000*1.5%)	4,500	2.67301	12,029
Principal	300,000	0.83962	251,886
Value of sales revenue			263,915

effective interest method
Date	Interest recipt [A]	Interest revenue @6% [B]	Discount amortized C = B - A	carrying amount of note D = Previous' D - C
Year 0				263,915
Year 1	4,500	15,835	11,335	275,250
Year 2	4,500	16,515	12,015	287,265
Year 3	4,500	17,235	12,735	300,000

Interest revenue = Previous period's carrying amount of note * 6%

Date	Accounts title	Debit	Credit
December 31, 20x0	Notes receivable	300,000
	Discount on Note receivable (300000-263915)		36,085
	Sales revenue		263,915
	To record notes received for selling the goods.
December 31, 20x1	Cash	4,500
	Discount on Note receivable	11,335
	Interest revenue		15,835
	To record interest revenue on notes.
December 31, 20x2	Cash	4,500
	Discount on Note receivable	12,015
	Interest revenue		16,515
	To record interest revenue on notes.
December 31, 20x3	Cash	4,500
	Discount on Note receivable	12,735
	Interest revenue		17,235
	To record interest revenue on notes.
December 31, 20x3	Cash	300,000
	Notes receivable		300,000
	To records cash receipts for principal of notes.

Discount on Note receivable can be replaced by "Unearned interest revenue".