Answer:
1)
June 30, 2018 merchandise sold on account
Dr Notes receivable 42,452.83
Cr Sales revenue 42,452.83
December 31, 2018 accrued interest
Dr Accrued interest receivable 1,698.11
Cr Interest revenue 1,698.11
March 31, 2019 notes receivable collected
Dr Cash 45,000
Cr Notes receivable 42,452.83
Cr Interest revenue 849.06
2) since this note receivable was a current note receivable due within 9 months, I did my calculations using the 8% annual rate as the effective interest rate. The time is too short to use compound interest which would have increased the effective interest rate, usually compound interest is used for non-current notes (more than 1 year).
r = (1 + i/n)ⁿ - 1
r = (1 + 8%/1)¹ - 1 = 8%
Explanation:
first we must calculate the present value of the note receivable:
present value = future value / (1 + r)ⁿ
- future value = $45,000
- r = 8% annual x 9/12 months = 6%
- n = 1
present value = $45,000 / 1.06 = $42,452.83
accrued interest Dec. 31 = $42,452.83 x 4% = $1,698.11
3 month interest = $42,452.83 x 2% = $849.06
effective interest formula:
r = (1 + i/n)ⁿ - 1
r = (1 + 8%/1)¹ - 1 = 8%
