Question

On June 30, 2021, the Esquire Company sold merchandise to a customer and accepted a noninterest-bearing...

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 $40,000 on March 31, 2022. The fair value of the merchandise exchanged is $37,600. Esquire views the financing component of this contract as significant.

Required:

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?

Homework Answers

Answer #1

1)

Date Account title Debit credit
June 30 2021 Note receivable 40000
Discount on note receivable 2400
sales revenue 37600
December 31 2021 Discount on note receivable 1600
Interest revenue 1600
march 31 2022 Discount on note receivable 800
Interest revenue (2400-1600) 800
March 31 2022 cash 40000
Note receivable 40000

The note is outstanding for total period of 9 months (30June - 31March ). so out of this 9 months ,interest revenue accrued for 6 months (30June -Dec 31)= 2400*6/9 = 1600

2)Discount amount = Face value of note *r *n/12

   2400 = 40000* r *9/12

   2400/40000 = r*9/12

    .06*12/9 = r

    r = .08 or 8%

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