Question

Jole Co. lent $10,000 to a major supplier in exchange for a non interest bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next three years. The market rate for a note of this type is 10%. On issuing the note, Jole should record:________.
a. Both discount on note receivable and deferred charge.
b. Discount on note receivable only.
c. Deferred charge only.
d. Neither discount on note receivable nor deferred charge.

Answer 1

Answer: a. . Both discount on note receivable and deferred charge.

Explanation:

To correctly account for this transaction both the discount and the deferred charge should be recorded.

The note is a non-interest bearing note which means that profit will only be made on it if it was bought on a discount with the full amount due for refund at maturity. To correctly account for this then the discount rate must be recorded to ensure that the discount is recognized.

Jole Co. also made a commitment to purchase a fixed amount of goods at 10% which means that there is now a purchase commitment which has to be recognized in the books so they must record that deferred charge as well.