Finkel sold merchandise to a customer in exchange for a four-year, noninterest-bearing note for $10,000. An equivalent loan would have a 10% interest rate. Finkel would record sales revenue on the date of sale equal to:
a. $0
b. $10,000
c. The present value of $10,000, discounted at a 10% discount rate for four years
d. $9,000, equal to $10,000 â (10% Ã $10,000)
Questions:
a. What is the present value amount?
b. What is the journal entry for the sale?
c. Assume that the transaction took place on the last day of the year, what is the journal entry on the last day of the following year?

Correct answer is

c. The present value of $10,000, discounted at a 10% discount rate for four years

Question

a. Present value

$6,830

b. Journal Entry for sale

Dr. Note Receivable  $10,000

Cr. Discount on Note $3,170  

Cr. Sales                     $6,830

c. Journal Entry on last day of following year

Dr. Discount on Note $792.5

Cr. Interest revenue   $792.5  

Explanation:

a.

As there is no Interest will be received on this note, Only face value will be received after 4 years.

Use Following present value form

PV = FV / (1 + i%)^n

PV = $10,000 / ( 1 + 10%)^4

PV = $6,830

b.

Amount of Sale Is calculated by taking present value of the future cash flows associated with the note. Receivable of $10,000 will be recorded and the difference will be recorded as unearned revenue, which will be recognized every year until the maturity.

c.

The interest revenue is recognized against the discount on note value recorded earlier.

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