Question

On June 30, 2018, the Esquire Company sold some merchandise to a customer for $41,000 and agreed to accept as payment a noninterest-bearing note with an 6% discount rate requiring the payment of $41,000 on March 31, 2019. The 6% rate is appropriate in this situation. Esquire views the financing component of this contract as significant.

Required:

1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), the December 31, 2018 interest accrual, and the March 31, 2019 collection.
2. What is the effective interest rate on the note?

Answer 1

1) Journal Entries
Date	Particulars		Debit	Credit
30-06-2018	Notes Receivable		41000
	Sale Revenue			39155
	Discount on Notes receivable			1845
Discount on notes receivable = Notes receivable*interest rate*time
Discount on notes receivable = 41000*6%*9/12 = 1845
Journal entries for interest acrual
Date	Particulars		Debit	Credit
31-12-2018	Discount on notes receivable		1230
	interest revenue			1230
Discount on notes receivable = Notes receivable*interest rate*time
Discount on notes receivable = 41000*6%*6/12= 1230
Journal entries for interest accrual & collection
Date	Particulars		Debit	Credit
31-Mar	Discount on notes receivable		615
	interest revenue(41000*6%*3/12)			615
31-Mar	Cash		41000
	notes receivable			41000
2) Computation of the Effective rate of interest
Particulars				Amount
Interest for 9 month				1845
Sale price				39155
Interest rate for 9month = (interest for 9 month/sales price)				4.7%
Effective interest rate 4.7%*12/9				6.27%