Question

NEW YEAR’S EVE SALE!!!    24-MONTH ZERO % FINANCING!!!   ONE DAY ONLY!!!

It is December 31, 2020 and Boyer Chevrolet offers a customer a 2020 Malibu for $29,000 but with 2-years to pay.  The customer is asked to sign the promissory note depicted below.

  

The accountant at Boyer proposes the following accounting for the deal.

Date	Account Titles	Debit	Credit
2020
Dec 31	Notes receivable	29,000
	Sales		29,000

The accountant smiled as he overlooked the busy showroom and was overheard making the following comment: “with this sale, we should be able to hit our profit targets for the 4^thquarter and get our bonuses.”  

A Malibu of this type normally sells for a cash price of $25,000.  Do you agree with the above accounting?  If not, provide an alternative accounting for the deal.  

Date	Account Titles	Debit	Credit

Answer 1

The entry made of notes receivable debit to sales credit of $29,000 is not correct.
This is because the value of goods sold is $25,000 and notes receivable issued is of $29,000 and thus the difference indicates premium on notes receivable.
Journal entry recorded would be as follows:
Date	Account titles	Debit	Credit
	Notes receivable	$29,000
	Premium on notes receivable		$4,000
	Sales		$25,000
	(To record sales revenue)