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 $30,000 on March 31, 2022. The fair value of the merchandise exchanged is $28,200. Esquire views the financing component of this contract as significant. 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

Answer:

1.-  

notes receivables 28,200 debit

      Sales Revenues        28,200 credit

--to record sale in exchange of a note--

notes receivables 1,200 debit

  interest revenue             1,200 debit

--to record year-end adjustment--

cash                   30,000 debit

     interest revenue              600 credit

     note receivable           28,400 credit

2.- effective rate 8.51%

Explanation:

Assuming the note bears interest:

principal x rate x time = interest

also:

future value - principal = interest

30,000 - 28,200 = 1,800

time: March 31,2022 - June 30,2021 = 9 months

thus:

28,200 x rate x 9/12 = 1,800

21,150 x rate = 1,800

rate = 1,800 /  21,150 =

rate  = 0,0851063 = 8.51%

accrued interest at december 31th:

28,200  x 8.51% x 6/12 = 1200