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On January 1, 2020, Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer's inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

(a) Prepare the journal entry to record the initial transaction on January 1, 2017.
(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.

Respuesta :

Answer:

Explanation:

Borrowed and received   4,000,000  

Zero Interest bearing note due in 3 years    

The appropriate rate to which to impute Interest 8%  

Calculate Present Value of $400,000 at 8% for 3 years  

Present Value would be        317,533  

Discount value derived 400,000-317,533          82,467  

Jan 1'2020

Dr Cash        4,00,000  

Dr Discount on Note Payable            82,467  

     Cr Note Payable  4,00,000

     Cr Unearned revenue       82,467

Dec 31'2020

Dr Interst expenses            25,403  

    Cr Discount on Note payable       25,403

( present value *8% = $317533*8%)  

 

Dec 31'2020

Dr Unearned revenue            27,489  

    Cr Discount on Note payable       27,489    

(82467/3)

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