Question

Bolt Electric sold a diesel generator to Windy Marine on January 1. Instead of paying cash immediately, Windy Marine issued a 1 year, non-interest bearing note to Bolt. The face amount of the note is $38,700, and the implicit interest rate is 8% compounded quarterly. The cost of the generator to Bolt Electric is $28,000.

(a) What is the journal entry on Bolt Electric's Books to recognize the sale of the generator?

(b) What is the journal entry on Bolt Electric's books to recognize the effect on inventory, assuming the perpetual system is used?

Answer 1

a)quarterly rate = 8/4= 2% per quarter         [4quarters in a year]

Number of quarters in a year = 4

Present value of Note = Face value *PVF2%,4

                             = 38700 * .92385

                             = 35753

DATE	ACCOUNT TITLE	DEBIT	CREDIT
January 1	Note receivable	38700
	Discount on note receivable		2947
	sales revenue		35753

Find present value factor using the formula :1/(1+i)^n where i = 2% ,n= 4

b)

DATE	ACCOUNT TITLE	DEBIT	CREDIT
January 1	cost of goods sold	28000
	Merchandise inventory		28000