Question

ssignment #5: Chapter 6 Gradebook 13.35/ Question 7 View Policies Show Attempt History Current Attempt in Progress On March 1, 2020, Carla Vista Company sold goods to Tamarisk Inc. for $654.000 in exchange for a five-year, zero-interest- bearing note in the face amount of $1.053.274. The goods have an inventory cost on Carla Vista's books of $406.000. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Your answer is correct. Determine the effective interest rate imputed in the note using Excel or a financial calculator

Answer 1

Solution Fair value of Goods sold $654,000 Face value of zero interest bearing notes receivable $1,053,274 Period of notes receivable 5 Years Step-1: Compute effective interest rate imputed in the note Imputed present value factor $654,000/ $1,053,274 0.62092 On locating in the present value factor table, it can be noted that at discount rate 10 %, the present value of $1 for 5 annual periods is 0.62092 i.e. equal to the above calculated imputed presnt value factor, hence the effective interest rate imputed in the note is 10% Effective interest rate 10% Step-2: Compute the interest revenue accrued till December 31, 2020 Accrued interest till December 31, 2020 = $654,000 x 10 % x 10m / 12m $54,500 Step-3: Journal Entry Account Titles and Explanation Debit Credit Date Dec. 31, 2020 Notes Receivable $54,500 $54,500 Interest Income (To record accrued interest)