Question

On January 1, 2021, Wright Transport sold four school buses to the Elmira School District. In exchange for the buses, Wright received a note requiring payment of $520,000 by Elmira on December 31, 2023. The effective interest rate is 8%. (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. How much sales revenue would Wright recognize on January 1, 2021, for this transaction?

2. Prepare journal entries to record the sale of merchandise on January 1, 2021 (omit any entry that might be required for the cost of the goods sold), the December 31, 2021, interest accrual, the December 31, 2022, interest accrual, and receipt of payment of the note on December 31, 2023.

Answer 1

Solution:-

1. The sales revenue that Wright will recognize on 1 January, 2021 :-

Sales revenue = Value of note * PVF @ 8% for 3rd year

= $520000 x (1/1.08)^3

= $412,793

2. The journal entries for the transactions related to sales:-

Date	Accounts titles and explanation	Debit	Credit
1-Jan-21	Notes receivable	$520,000
	Discount on notes receivable (520,000 - 412793))		$107,207
	Sales revenue		412793
	(To records sales revenue)
31-Dec-21	Discount on notes receivable (412,793 * 8%)	33,023
	Interest revenue		33,023
	(To record interest accrual)
31-Dec-22	Discount on notes receivable (412,793 + 33,023)* 8%	35,665
	Interest revenue		35,665
	(To record interest accrual)
31-Dec-23	Cash	520,000
	Discount on notes receivable (412,793 + 33,023 + 35,665)* 8%	38518
	Interest revenue		38518
	Notes receivable		520,000
	(To record interest accrual and cash received against notes receivable)

Please Rate or comment if you have any doubt regarding this solution.