Question

Riverbed Corporation issued a 5-year, $88,000, zero-interest-bearing note to Garcia Company on January 1, 2017, and received cash of $88,000. In addition, Riverbed agreed to sell merchandise to Garcia at an amount less than regular selling price over the 5-year period. The market rate of interest for similar notes is 15%.

Prepare Riverbed Corporation’s January 1 journal entry. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

Answer 1

Solution:

Journal Entry:

Date	Account titles and Explanation	Debit	Credit
Jan. 1, 2017	Cash [Given]	$ 88,000
	Discount on Note Payable [Note:1]	$ 44,248
	Note Payable [Given]		$ 88,000
	Unearned Sales Revenue		$ 44,248
	( To record note issue and agreement to sale)

Notes:

1) Discount on notes payable = Issue Price - Present value of zero interest note = $ 88,000 - $ 43,752 =$ 44,248

Present value of zero interest note = $ 88,000*Present Value factor @15%for 5th year = $88,000 * 0.49717[1/1.15^5] = $ 43,752

2) Unearned sales revenue is the balancing figure in calculation.