Question

On June 30, 2018, the Esquire Company sold some merchandise to a customer for $46,000 and agreed to accept as payment a noninterest-bearing note with an 12% discount rate requiring the payment of $46,000 on March 31, 2019. The 12% rate is appropriate in this situation. Esquire views the financing component of this contract as significant.

Required:
a. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), the December 31, 2018 interest accrual, and the March 31, 2019 collection.
b. What is the effective interest rate on the note?

Answer 1

a)

June 30, 2018

Dr Notes receivable 46,000

Cr Sales revenue 42,202

Cr Discount on notes receivable 3,798

PV of notes receivable = $46,000 / [1 + (9/12 x 12%)] = $42,202

December 31, 2018

Dr Discount on notes receivable 2,760

Cr Interest revenue 2,760

Interest revenue = $46,000 x 12% x 6/12 = $2,760

March 31, 2019

Dr Cash 46,000

Dr Discount on notes receivable 1,038

Cr Notes payable 46,000

Cr Interest revenue 1,038

b) effective interest rate = 0.96% x 12 = 11.52% annual