Question

Opal Mining sold coal to Petric Electric, receiving a six-month, noninterest-bearing note for $200,000. The fair value of the goods sold to Petric is $192,000. Opal uses a periodic inventory system, and views the financing component of this transaction to be significant. Required: 1. Prepare the journal entry to record the sale. 2. Compute the effective annual rate of interest.

Answer 1

1) the journal entry to record the sale:

Dr Accounts receivable 200,000

Cr Sales revenue 192,000

Cr Interest revenue 8,000

Generally a six month note would be recorded at face value since it is a current asset, but since the company considers it to have a significant financing component, we must record sales revenue and interest revenue separately.

2) the effective interest rate on a simple interest loan = interest / principal = $8,000 / $192,000 = 4.17% semiannual or 8.33% annual effective interest rate