Question

on june 30, 2024, the esquire company sold merchandise to a customer and accepted a noninterest-bearing note in exchange. the note requires payment of $39,000 on march 31, 2025. the fair value of the merchandise exchanged is $35,490. esquire views the financing component of this contract as significant. required: 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, 2024 interest accrual, and the march 31, 2025 collection. what is the effective interest rate on the note?

Answer 1

The journal entries to record the sale of merchandise, interest accrual, and collection, along with the calculation of the effective interest rate on the note.

Step-by-step explanation:

The journal entries to record the sale of merchandise and the subsequent interest accrual and collection are as follows:

1. To record the sale of merchandise:
   Accounts Receivable: $39,000
   Sales Revenue: $35,490
   Discount on Note: $3,510
2. To accrue interest on December 31, 2024:
   Interest Receivable: $882
   Interest Revenue: $882
3. To record the collection on March 31, 2025:
   Notes Receivable: $39,000
   Interest Receivable: $882
   Cash: $39,882

The effective interest rate on the note can be calculated by dividing the discount on the note ($3,510) by the fair value of the merchandise exchanged ($35,490), and then multiplying by the number of days from June 30, 2024, to March 31, 2025. This calculation gives an effective interest rate of approximately 9.86%.

Answer 2

Esquire Company's noninterest-bearing note requires journal entries for the sale, interest accrual, and collection. The effective interest rate can be calculated based on the difference between the note's maturity value and the fair value of merchandise, accounting for the time period of the note.

Step-by-step explanation:

The student is dealing with a business accounting scenario where a noninterest-bearing note is used as payment for merchandise. To account for the sale and the interest component, we need to make journal entries at different time points: at the time of the sale, at the end of the fiscal year for interest accrual, and at the collection date of the note. To determine the effective interest rate, we need to impute the interest based on the present value of the note and the fair value of the merchandise.

Journal Entries

At the time of sale (June 30, 2024):

1. Debit Notes Receivable: $39,000
2. Credit Sales Revenue: $35,490
3. Credit Interest Revenue (to balance): $3,510

Interest Accrual (December 31, 2024):

1. Debit Interest Receivable: [calculated amount based on effective interest rate]
2. Credit Interest Revenue: [calculated amount based on effective interest rate]

Collection of note (March 31, 2025):

1. Debit Cash: $39,000
2. Credit Notes Receivable: $39,000

To calculate the effective interest rate, we consider the time period of the note (9 months) and the difference between the note's maturity value ($39,000) and the fair value of the merchandise ($35,490), which is considered the interest. The effective interest rate can be calculated using the formula:

Interest = Maturity Value - Present Value

Effective Interest Rate = Interest / Present Value / Time Period

Applying these formulas will give us the effective interest rate for the note.