Part A On January 1, 2018, ABC Co. provides goods to a customer with the following...

Part A On January 1, 2018, ABC Co. provides goods to a customer with the following payment plan: Date Amount Jan 1, 2018 $1,500 Jan 1, 2019 $1,000 Jan 1, 2020 $1,000 Jan 1, 2021 $1,000 Jan 1, 2022 $4,000 Total $8,500 The customer normally would be subject to 8% interest. Required: a) What is the product revenue that is recorded by ABC on the sale on January 1, 2018? b) What will be the interest revenue for 2018 for ABC as a result of this transaction? Show and label all calculations. State all factors. You may use your finance formulas or tables from the book only. Part B SMU Inc. sold product to a customer on December 31, 2018. The customer’s price was “$10,000 with no interest”. The customer only has to make annual payments of $2,000 per year for five years, starting December 31, 2019. The customer would normally be subject to 10% interest based on their risk level. The cost of the product sold was $7,000 to SMU. Required: a) Calculate the revenue SMU Inc. would record on the car sale in 2018. (Show your calculations.) **USE PV tables from the book only. State all factors. b) Calculate the gross profit on the product sale. c) Prepare all journal entries for 2018 and 2019 as a result of this arrangement. d) What is the value of the outstanding note receivable from the customer after the first payment on December 31, 2019?

Expert Solution

Solution A:

Year	Payment	PV factor @8%	Present value
01-Jan-18	1500	1	1500.00
01-Jan-19	1000	0.925926	925.93
01-Jan-20	1000	0.857339	857.34
01-Jan-21	1000	0.793832	793.83
01-Jan-22	4000	0.735030	2940.12

Total Present value			7017.22

a) Product revenue on January 1, 2018 = $7,017.22

b) Amount outstanding for 2018 = $7017.22 - $1500 = $5517.22

Interest Revenue for 2018 = $5517.22 *8% = $441.38

Solution B:

Year	Payment	PV factor @10%	Present value
31-Dec-19	2000	0.909091	1818.18
31-Dec-20	2000	0.826446	1652.89
31-Dec-21	2000	0.751315	1502.63
31-Dec-22	2000	0.683013	1366.03
31-Dec-23	2000	0.620921	1241.84

Total Present value			7581.57

a) Revenue on the car sale in 2018 = $7581.57

b) Gross profit = $7581.57 - $7000 = $581.57

c)

Date	Accounts Title	Debit	Credit
31-Dec-18	Accounts Receivable Dr	7581.57
	To Sales Revenue		7581.57

31-Dec-19	Cash Dr	2000
	To Accounts Receivable		1818.18
	To Interest Revenue		181.82

d) Outstanding note receivable after the first payment on December 31, 2019 = $7581.57 - $1818.18 = $5,763.39

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