Question

On January 1, 2017, Stellar Co. borrowed and received $517,000 from a major customer evidenced by a zero-interest-bearing note due in 4 years. As consideration for the zero-interest-bearing feature, Stellar 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 8%. (a) Prepare the journal entry to record the initial transaction on January 1, 2017. (b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Stellar’s product to this customer occur evenly over the 4-year period. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

		Journal Entries
	Date	Account Title	Debit-$	Credit-$	Calculation
a	I jan 2017	Cash	5170000
		Discount on notes payable	136989.57
		Notes Payable		517000
		Unearned Sales Revenue		136989.57
		for recording the notes payable and unearned sales revenue
b	31-Dec-17	Interest Expense	30400
		Discount on notes payable		30400
		for recording the interest expenses
	31-Dec-17	Unearned Sales Revenue	34247.39		136989.57/4
		Sales Revenue		34247.39
		for recording sales revenue
	WN	Calculation of Discount on Notes Payable
		517000-PV(8%,4,0,-517000,0)
		$136,989.57
		Calculation of Interest Expenses
		PV=517000*PVIF(r=8%,n=4)
		517000*.7350298
		380010
		Interest =380010*8%
		30400