Question

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 $46,000 on March 31, 2022. The fair value of the merchandise exchanged is $41,860. 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?

Answer 1

1.

Date	General Journal	Debit	Credit
June 30, 2021	Notes receivable	$46,000
	Discount on notes receivable		$4,140
	Sales revenue		$41,860
Dec 31, 2021	Discount on notes receivable	$2,760
	Interest revenue (4,140*6/9)		$2,760
March 31,2022	Discount on notes receivable	$1,380
	Interest revenue (4,140*3/9)		$1,380
March 31,2022	Cash	$46,000
	Notes receivable		$46,000

2.

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

$4,140 = $46,000 * r * (9/12)

4,140 / 46,000 = r * (9/12)

  0.09 * (12/9) = r

r = 0.12 (or) 12%

Effective rate of interest rate = 12%

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