Question

On June 30, 2021, the Esquire Company sold merchandise to a customer and accepted a noninterest-bearing note in exchange. The note requires payment of $32,000 on March 31, 2022. The fair value of the merchandise exchanged is $29,600. 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), any December 31, 2021 interest accrual, and the March 31, 2022 collection.
2. What is the effective interest rate on the note?

Complete this question by entering your answers in the tabs below.

Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any December 31, 2021 interest accrual, and the March 31, 2022 collection. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

Journal entry worksheet

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	Date General Journal Debit Credit June 30, 2021

	Date General Journal Debit Credit December 31, 2021

	Date General Journal Debit Credit March 31, 2022

• Record the cash collection.

	Date General Journal Debit Credit March 31, 2022

What is the effective interest rate on the note? (Round your intermediate calculations and the final percentage answer to 3 decimal places.)

	Effective interest rate    %

Answer 1

In the given question, as it is mentioned as Esquire views the financing component as significant, any excess amount received over and above the amount of value of sale of merchandise should be treated as interest income. Therefore the interest component of the above mentioned note is $32000 - $29600 = $2400 that will be earned by the company during the 9 months (6/30/2021 to 3/31/2022). Therefore, on 12/31/2021 the interest earned for 6 months should be accrued in the books i.e., Debit Interest receivable account and credit Interest income account.

Initially, when the customer accepts the notes receivable on 06/30/2021, the notes receivable account should be debited to the extent of the sale value of the merchandise i.e., $ 29600 and on 12/31/2022, the interest earned should be recognized in the books by debiting the interest receivable account with the amount equal to 6 months interest.

On 03/31/2022 the interest earned on next 3 months (01/01/2022 to 03/31/2022) will be recognized in the books and when the customer makes the total payment of 32,000 cash account will be debited by 32000 and the notes receivable account will be credited by 29600, interest receivable account will be credited by 2400 (9 months interest).

Calculation of Effective interest rate:

Total interest earned over the period 32000 - 29600 = 2400

Total period = 6/30/2021 to 3/31/2022 = 9 months

Interest amount annualized = 2400 x (12/9) = 3200

Therefore, Interest % = (3200/29600)*100 = 10.81% per annum

Journal Entries: