Question

On June 30, 2021, the Esquire Company sold merchandise to a customer and accepted a noninterest-bearing note in exchange. The note requires payment of $49,000 on March 31, 2022. The fair value of the merchandise exchanged is $46,060. Esquire views the financing component of this contract as significant.

Required:

1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any December 31, 2021 interest accrual, and the March 31, 2022 collection.
2. What is the effective interest rate on the note?

Answer 1

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Solution: Format and Naming convention is not available, can be slightly different: Entry 3rd or 4th on Mar 31, 2022 can be a combined or separte entries: 1) Credit Date Jun.30 2021 Debit $ 49,000 $ 2,940 $ 46,060 $ 1,960 Dec.31 2021 Jounal entries Account title and explaination Note Receivable Discount on Note Receivable (plug) Sales Revenue (To record the investment in bonds) Discount on Note Receivable (2940/9*6) Interest Revenue (To record Accrual of interest) Discount on Note Receivable (2940/9*3) Interest Revenue (To record Accrual of interest) Cash Note Receivable (To record the collection of note) $ 1,960 $ 980 Mar.31 2022 $ 980 $ 49,000 Mar.31 2022 $ 49,000 2) Effective Interest rate of note = (2940/46060) = 6.383% Effective Interest Annualized = (6.383%)/9*12= 8.511% $ 49,000 $ 980 Mar.31, can be also be as below, per question format: Mar.31 Cash 2022 Discount on Note Receivable Interest Revenue Note Receivable (To record the collection of note) $ 980 $ 49,000