Question

On October 31, 2016, Quesnell Corp. (QC), a publicly accountable entity, sold inventory to a customer in exchange for a $ 450,000, three-year, 3% note receivable. QC’s incremental borrowing rate at the inception of the note receivable was 4%, and the customer’s incremental borrowing rate was 7%. QC’s original cost of the inventory sold was $325,000.

QC collected the note in full on October 31, 2019. Interest was received annually on October 31, and the first interest payment was received on October 31, 2017, as per the terms of the note.

QC has a year end of October 31.

Required:
Prepare the journal entries relating to this transaction for the full three-year period from October 31, 2016, to October 31, 2019.

Answer 1

Journal Entries to be made:

Date	General Ledger Name	Debit	Credit
31/10/2016	Receivable A/c---Dr	400,048
	To Revenue A/c		400,048
	(Being sales recorded)
31/10/2016	3% note receivable A/c---Dr	450,000
	To Finance income received in advance A/c		49,952
	To Receivable A/c		400,048
31/10/2017	Cash A/c---Dr	13,500
	To Interest income A/c		13,500
	(Being interest received)
31/10/2017	Finance income received in advance A/c---Dr	16,651
	To Interest income A/c		16,651
	(Being interest income recorded for financing component)
31/10/2018	Cash A/c---Dr	13,500
	To Interest income A/c		13,500
	(Being interest received)
31/10/2018	Finance income received in advance A/c---Dr	16,642
	To Interest income A/c		16,642
	(Being interest income recorded for financing component)
31/10/2019	Cash A/c---Dr	13,500
	To Interest income A/c		13,500
	(Being interest received)
31/10/2019	Finance income received in advance A/c---Dr	17,308
	To Interest income A/c		17,308
	(Being interest income recorded for financing component)
31/10/2019	Cash A/c—dr	450,000
	To 3% note A/c		450,000
	(Being note collected)

Computation of transaction price-
Sales price	450,000
Increment rate of borrowing of customer	7%
Rate of interest charged	3%
Interest implicit	4%
PV factor of 4% for 3 years	0.89
Transaction price to be recorded	400,048
Interest to be accounted-
Year 1	16,002
Year 2	16,642
Year 3	17,308