Question

On January 1, 2018, Wright Transport sold four school buses to the Elmira School District. In exchange for the buses, Wright received a note requiring payment of $524,000 by Elmira on December 31, 2020. The effective interest rate is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

Required:

1. How much sales revenue would Wright recognize on January 1, 2018, for this transaction?
2. Prepare journal entries to record the sale of merchandise on January 1, 2018 (omit any entry that might be required for the cost of the goods sold), the December 31, 2018, interest accrual, the December 31, 2019, interest accrual, and receipt of payment of the note on December 31, 2020.

Answer 1

1. sales revenue = value of note * Present value factor of 9% for 3 years.

here,

present value factor = 1/(1+r)^n

r=0.09

n=3 years

=>1/(1.09)^.3

=>0.77218.

sales revenue = $524,000*0.77218

=>$404,622.32.

sales revenue to be recognized on January 1 2018 =$404,622.

2.

Date	accounts	debit	credit
Jan 1 2018	Notes receivable a/c	524,000
	........To discount on notes receivable		119,378
	........To sales revenue		404,622
Dec 31 2018	Discount on notes receivable	36,416
	.......To interest revenue		36,416
	(amount = 404,622 *9%)
dec 31 2019	discount on notes receivable	39,693
	........To interest revenue a/c		39,693
	(amount = (404,622+36,416=>441,038 *9%)=>39,693)
dec 31 2020	Cash a/c	524,000
	discount on notes receivable	43,269
	......................To interest revenue		43,269
	......................To notes receivable		524,000
	(discount on notes receivable = 119,378 cr in first entry - 36,416 dr in second entry - 39,693 dr in third entry=>43,269)