Question

On January 1, 2017, Metlock Co. borrowed and received $470,000 from a major customer evidenced by a zero-interest-bearing note due in 5 years. As consideration for the zero-interest-bearing feature, Metlock 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 9% (a) Prepare the journal entry to record the initial transaction on January 1,2017. Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Metlock's product to this customer occur evenly over the 5-year period. (b) 5 decimal places, 1.25124 and the final an (Round present value factor calculations amounts Credit account titles are automatically indented when amount i to 0 decimal pla ces e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the entered. Do not indent manually.) Debit Credit No. Date Account Titles and Explanation (a) January 1, 2017 Bad Debt Expense 470,000 470,000 (b) December 31, 2017 Interest Expense 33840 33840 (To record Interest Expense) December 31, 2017 33840 33840 (Torecord Unearned Sales Revenue)

Answer 1

SOLUTION

Present Value of Zero Interest Bearing Note = Value of Zero Interest Bearing Note*Present value factor

= 470,000 * (PVF 5, 9%)

= 470,000 * 0.64993

= 305,467

Journal entries-

S.No.	Date	Accounts titles and Explanation	Debit ($)	Credit ($)
a.	January 1, 2017	Cash	470,000
		Discount on notes payable (470,000-305,467)	164,533
		Notes payable		470,000
		Unearned sales revenue		164,533
		(To record the purchase of zero interest bearing bond)
b.	Dec.31, 2017	Interest expense	27,492
		Discount on notes payable (305,467*9%)		27,492
		(To record interest expense)
	Dec.31, 2017	Unearned sales revenue	32,907
		Sales revenue (164,533/5 years)		32,907
		(To record Unearned sales revenue)