Question

In: Accounting

On January 1, 2020, Ayayai Co. borrowed and received $465,000from a major customer evidenced by...

On January 1, 2020, Ayayai Co. borrowed and received $465,000 from a major customer evidenced by a zero-interest-bearing note due in 5 years. As consideration for the zero-interest-bearing feature, Ayayai 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 10%.

(a)
Prepare the journal entry to record the initial transaction on January 1, 2020.
(b)
Prepare the journal entry to record any adjusting entries needed at December 31, 2020. Assume that the sales of Ayayai’s product to this customer occur evenly over the 5-year period.


(Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.

Date

Account Titles and Explanation

Debit

Credit

(a)Jan. 1, 2020Dec. 31, 2020

















(b)

Jan. 1, 2020Dec. 31, 2020











(To record Interest Expense)




Jan. 1, 2020Dec. 31, 2020











(To record Unearned Sales Revenue)

Solutions

Expert Solution

Recording of journal entries:

S.no Date Account Titles and Explanation Debit Credit
(a) jan 1, 2020 Cash $465000
Discount on notes payable $176272
Notes payable $465000
Unearned sales revenue $176272
(To record the initial transaction)
(b) Dec 31, 2020 Interest expense $28873
Discount on notes payable $28873
(To record interest expense)
Dec 31, 2020 Unearned sales revenue $35254
Sales revenue $35254
(To record unearned sales revenue)

Notes:

1. Discount on notes payable

= Issue value of notes payable - present value of redemption value of note payable

= Amount borrowed on note - [Amount redeemed on note ÷ (1+i)n]

(Where, i = 10% = 0.1 and loan period, n = 5 years)

= $465000 - [$465000 ÷ (1+0.1)5]

= $465000 - [$465000 ÷ (1.1)5]

= $465000 - ($465000 ÷ 1.61051)

= $465000 - $288728

= $176272

2. Interest expense

= (Amount borrowed on note - Discount) × interest rate

= ($465000 - $176272) × 10%

= $288728 × 10%

= $28872.8

= $28873

3. Unearned sales revenue, adjusted at the year end

= Discount on notes payable ÷ loan period

= $176272 ÷ 5

= $35254.4

= $35254

ekkarill92 answered 2 years ago
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