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Chapter 14: 18E (page 757)

On January 1, 2017, Margaret 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鈥檚 inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions


(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery鈥檚 product to this customer occur evenly over the 3-year period.

Short Answer

Expert verified
  1. Unearned sales revenue is $82,468
  2. Interest expense is $25,403

Step by step solution

01

Meaning of Zero-Interest-bearing Note

The borrower won't require paying any interest during the four-year term of the zero interest note. Notes without interest do not imply that there is no interest. The inferred-interest rate is the current market rate built into the system.

02

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan 1, 2017

Cash

400,000

Discount on notes payable

82,468

Notes payable

400,000

Unearned sales revenue

($400,000-$317,532)

82,468

Working notes:

Face value

$400,000

Present value of 1 at 8% for 3 years

0.79383

Present value

$317,532

03

(b) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Dec 31, 2017

Interest expense ($317,532脳8%)

25,403

Discount on notes payable

25,403

Dec 31, 2017

Unearned sales revenuedata-custom-editor="chemistry" ($82,4683)

27,489

Sales

27,489

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Most popular questions from this chapter

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of \(350,000 at the time of purchase. A \)550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.

Devers Corporation issued $400,000 of 6% bonds on May 1, 2017. The bonds were dated January 1, 2017, and mature January 1, 2020, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers鈥檚 journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

On January 1, 2017, Henderson Corporation redeemed \(500,00 of bonds at 99. At the time of redemption, the unamortized premium was \)15,000. Prepare the corporation鈥檚 journal entry to record the reacquisition of the bonds.

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months鈥� interest and the amortization of premium on the bonds.
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