Question

3. Non-interest bearing note

On June 30, 2016, the Esquire Company sold some merchandise to a customer for $30,000 and agreed to accept as payment a noninterest-bearing note with an 8% discount rate requiring the payment of $30,000 on March 31, 2017. The 8% rate is appropriate in this situation.

Required:

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, 2016 interest accrual, and the March 31, 2017 collection.

What is the effective interest rate on the note?

Answer 1

Concepts and reason

Non-interest bearing note:

Noninterest bearing note is a type of note which has interest amount in the face value. The note is issued at a price lower than the face value and at maturity face value is paid. Interest is implied in the face value and the difference between the issue price and face value is considered as interest.

Fundamentals

Journal:

Journal entry is the first step in the accounting. It is recorded to keep accounting transaction in the chronological order, after recording the journal entries; ledger can be prepared and financial statements afterwards.

Prepare the journal entries to record the sale of merchandise as shown below:

Prepare the journal entries to transfer the balance in discount on notes receivable to interest revenue account as shown below:

Prepare the journal entries to transfer the balance in discount on notes receivable to interest revenue account as shown below:

Prepare the journal entries to record the receipt of cash against notes receivable as shown below:

Compute the effective rate of interest as shown below.

Ans:

.

.

.

.

Effective rate of interest is 8.511%.