Question

Arctic Cat sold Seneca Motor Sports a shipment of snowmobiles that have a fair market value of $30,700. Seneca paid for the snowmobiles on January 1, 2021, with delivery to occur subsequently. Unless informed otherwise, assume that Arctic views the time value of money component of this arrangement to be significant, and that the relevant interest rate is 12%. (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: Assume that, on January 1, 2021, Seneca prepays Arctic for a December 31, 2021 delivery of the snowmobiles. Prepare the journal entry for Arctic to record collection on January 1, 2021, assuming Seneca prepays the present value of the snowmobiles. Prepare the journal entry for Arctic to record delivery of the snowmobiles on December 31, 2021. Assume instead that delivery is to occur on December 31, 2022. Prepare the journal entry for Arctic to record collection on January 1, 2021, assuming Seneca prepays the present value of the snowmobiles. Assume instead that Arctic does not view the time value of money component of this arrangement to be significant. Also assume that, on January 1, 2021, Seneca prepays Arctic for a December 31, 2021 delivery of the snowmobiles, and that Seneca prepays the present value of the snowmobiles. Prepare the journal entry for Arctic to record collection on January 1, 2021.

Answer 1

No.	Date	General Journal	Debit	Credit
1	Jan 1,2021	Cash	$27,411
		Deferred revenue		$27,411
2	Dec 31, 2021	Interest expense	$3,289
		Deferred revenue	$27,411
		Sales revenue		$30,700
3	Jan 1,2021	Cash	$24,474
		Deferred revenue		$24,474
4	Jan 1,2021	Cash	$27,411
		Deferred revenue		$27,411

Working note:

1. On Jan 1, 2021 ( r = 12% , n = 1 year)

Cash = $30,700 * 1 / (1+12%)¹

= $30,700 * 0.89286 = $27,411

2. On Dec 31, 2021

Interest expense = $27,411* 12% = $3,289

3. On Jan 1, 2021 ( r = 12% , n = 2 years)

Cash = $30,700 * 1 / (1+12%)²

= $30,700 * 0.79719 = $24,474

4. On Jan 1, 2021    ( r = 12% , n = 1 year)

Cash = $30,700 * 1 / (1+12%)¹

= $30,700 * 0.89286 = $27,411

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