Answer:
Assume the note indicates that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 39,700
Cr Sales revenue 36,759.26
Cr Discount on notes receivable 2,940.74
Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.
Assume the same facts as in requirement 1, and prepare the journal entry for Arctic to record collection of the payment on December 31, 2021.
Dr Cash 39,700
Cr Notes receivable 36,759.26
Cr Interest revenue 2,940.74
Assume instead that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2022. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 39,700
Cr Sales revenue 34,036.35
Cr Discount on notes receivable 5,663.65
Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.
Assume instead that Arctic does not view the time value of money component of this arrangement to be significant, and that the note indicates that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 33,900
Cr Sales revenue 33,900
Explanation:
Non interest bearing notes must be recorded at present value, so we need to determine the present value of the payment:
Payment due December 21, 2021, PV = $39,700 / (1 + 8%) = $36,759.26
Payment due December 21, 2022, PV = $39,700 / (1 + 8%)² = $34,036.35
We use the discount on notes receivable account (contra asset account) to decrease the net value of notes receivable.
