Question

1. Joey Ltd is entering into a contract to sell Motor vehicle spare parts to Rachel Ltd for $25 000. The agreement allows Rachel Ltd to pay for these goods by three equal instalments of $6 500 and the balance remaining payable in the final instalment, the first instalment being required on delivery and the remainder to be paid every 4 months over the coming year. The Motor Vehicle spare parts are delivered to Rachel Ltd on 1 March 2020. Johnson Ltd determine that an appropriate discount rate for interest on this transaction is 7% per annum. The agreement stipulates that the interest revenue is due and payable when each repayment is due.

Narrations are required for this question.

Add rows to the answer tables if necessary.

Required

1. Complete the table below to determine the interest component of the payments.                                              
2. Give the journal entries to record the revenue. Note that giving the correct dates of your journal entries is essential.            

Date	Opening Balance	Cash receipt	Interest income	Principal reduction	Outstanding balance

Answer 1

				A	B	C=A*7%	D=B-C	E=A-D
			Date	Opening Balance	Cash receipt	Interest income	Principal reduction	Outstanding balance
			March1,2020	$25,000	$6,500	$0	$6,500	$18,500
			July1,2020	$18,500	$6,500	$1,295	$5,205	$13,295
			Nov1,2020	$13,295	$6,500	$931	$5,569	$7,726
			March1,2021	$7,726	$6,500	$541	$5,959	$1,766
			March1,2021	$1,766	$1,766	$0	$1,766	$0
		JOURNAL ENTRIES TO RECORD THE REVENUE
	DATE	ACCOUNT TITLES	DEBIT	CREDIT
	March1,2020	Cash	$6,500
		Note Receivable	$18,500		(25000-6500)
		Sales Revenue		$25,000
		(To record Sale of Vehicle on credit at 7% interest and $6500 down payment)
	July1,2020	Cash	$6,500
		Note Receivable		$5,205
		Interest Income		$1,295
		(To Record Receipt of Instalment on Note Receivable)
	Nov1,2020	Cash	$6,500
		Note Receivable		$5,569
		Interest Income		$931
		(To Record Receipt of Instalment on Note Receivable)
	March1,2021	Cash	$8,266		(6500+1766)
		Note Receivable		$7,726	(5959+1766)
		Interest Income		$541
		(To Record Receipt of Last Instalment on Note Receivable)