Question

On January 1, 2018, Wright Transport sold four school buses to Elmira School District. In exchange for the buses, Wright received a note requiring payment of $518,000 by Elmira on December 31, 2020. The effective interest rate is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1, and PVAD of $1) (Use the appropriate factor(s) from the tables):

Required:

1. How much sales revenue would Wright recognize on January 1, 2018, for this transaction?

2. Prepare journal entries to record the sale of merchandise on January 1, 2018 (omit any entry that might be required for the cost of the goods sold), the December 31, 2018, interest accrual, the December 31, 2019, interest accrual, and receipt of payment of the note on December, 2020.

Answer 1

Requirement 1 Sales Revenue - Present value of the Notes Receivable - $518,000x 0.77218 $399,989.24 Note: PV of $1 for 3rd year at 990 is 0.77218. Therefore, the amount of sales revenue would be recognized on Jan. 1, 2018 is S399,989. Requirement 2 DebitCredit Date Account Title and Explanation 1-Jan-18 Notes Receivable Sales Revenue 518,000 399,989 118,011 Discount on Note Receivable (To record the sale of goods in exchange of note) 31-Dec-18 Discount on Note Receivable 35,999 Interest revenue (399,989 x 990) 35,999 (To record accrued interest) 31-Dec-19 Discount on Note Receivable 39,239 Interest revenue (399,989+35,999) x 9% (To record accrued interest) 39,239 31-Dec-20 Cash 518,000 Discount on Note Receivable 42,773 Interest revenue Notes receivable 42,773 518,000 (To record the accrued interest and collection on note) Debit to discount on note receivable on Dec. 31, 2020 is suppose to be ((399.989+35.999+39.239) x 990) 42,770 But, balance on discount on note receivable account is suppose to be zero as on Dec. 31, 2020 Hence, discount on note receivable on Dec. 31, 2020 is debited as (118,011-35,999-39,239) 42,773.