In: Accounting
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) |
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