Question

Chen inc. accepted a two-year non interest-bearing note for $605,000 on january 1, 2016. the note was accepted as payment for merchandise with a fair value of $500,000. the effective interest rate is 10%. what is the correct entry to record the note

Answer 1

This would be the journal entry to record the transaction for the non-interest bearing note:

January 1, 2016

Debit Notes Receivable 605,000

Credit Discount on notes receivable (605,000 – 500,000) 105,000

Credit Sales Revenue 500,000

 

As for the interest at the end of the month

Debit Discount on notes receivable 2,520.83

Credit Interest Revenue 2,520.83

 

Computation: 605,000 x .10 divided by 24 since it is 2 years