Question

Shlee Corporation issued a 4-year, $60,000, zero-interest-bearing note to Garcia Company on January 1, 2017, and received cash of $60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation's January 1 journal entry.

How is Shlee accounting for the agreement to sell below selling price accounted for (or is it accounted for)?

Answer 1

Solution:

Face value of Note = $60,000

Maturity = 4 years

Market Interest rate = 12%

Present value of Note = $60,000 * PV factor @12% for 4th period = $60,000* 0.635518 = $38,131

Discount on Note Payable = $60,000 - $38,131 = $21,869

Journal Entry
Date	Particulars	Debit	Credit
Jan-1-2017	Cash Dr	$60,000.00
	Discount on Note Payable Dr	$21,869.00
	To Note Payable		$60,000.00
	To Unearned Sales Revenue		$21,869.00
	(To record Note issued and Agreement to sell below selling price)

Agreement to sell below selling price is accounted for as Unearned sales revenue which will be equal to discount on note issued.