On January 1, 2020, Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer's inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

(a) Prepare the journal entry to record the initial transaction on January 1, 2017.

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery's product to this customer occur evenly over the 3-year period.

Question

Kasey Mcknight

Business

29 December, 16:33

On January 1, 2020, Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer's inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

(a) Prepare the journal entry to record the initial transaction on January 1, 2017.

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery's product to this customer occur evenly over the 3-year period.

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Answers (1)

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Omar · Answer 1

Borrowed and received 4,000,000

Zero Interest bearing note due in 3 years

The appropriate rate to which to impute Interest 8%

Calculate Present Value of $400,000 at 8% for 3 years

Present Value would be 317,533

Discount value derived 400,000-317,533 82,467

Jan 1'2020

Dr Cash 4,00,000

Dr Discount on Note Payable 82,467

Cr Note Payable 4,00,000

Cr Unearned revenue 82,467

Dec 31'2020

Dr Interst expenses 25,403

Cr Discount on Note payable 25,403

(present value * 8% = $317533*8%)

Dec 31'2020

Dr Unearned revenue 27,489

Cr Discount on Note payable 27,489

(82467/3)