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 $41,000 on March 31, 2022. The fair value of the merchandise exchanged is $39,155. 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

Answer and Explanation:

1. The journal entries are shown below:

On 30-Jun-21

Note receivables Dr $41,000

To Sales revenue $39,155

To Discount on note receivables $1,845

(Being sales revenue is recorded)

On 31-Dec-21

Discount on note receivables ($1,845 × 6 ÷ 9) $1,230

To Interest revenue $1,230

(Being interest accrual is recorded)

On 31-Mar-22

Discount on note receivables ($1,845 × 3 ÷ 9) $615

To Interest revenue $615

(Being interest accrual is recorded)

On 31-Mar-22

Cash Dr $41,000

To Note receivables $41,000

(being note collection at maturity is recorded)

2.

Effective interest rate on note is

= $1,845 ÷ $39,155 × 12 ÷ 9

= 6.28%