Question

On January 2, 2020, Pina Inc. sells goods to Geo Company in exchange for a zero-interest-bearing note with face value of $9,800, with payment due in 12 months. The fair value of the goods at the date of sale is $8,700 (cost $5,220). Prepare the journal entry to record this transaction on January 2, 2020. How much total revenue should be recognized in 2017?

Answer 1

Answer:

a. See the journal entry below.

b. The amount of total revenue that should be recognized in 2020 is $9,800.

Explanation:

Note: There is slight error in the question as 2017 was erroneously mentioned. The year 2020 is therefore used throughout in answering this question.

a. Prepare the journal entry to record this transaction on January 2, 2020.

The following can first be calculated as follows:

Discount on Notes Receivable = Face value of the note - Fair value of the goods = $9,800 - $8,700 = $1,100

The journal entries will therefore look as follows:

Date                    Particulars                           Debit ($)        Credit ($)    

02 Jan 2020    Notes Receivable                     9,800

                         Sales Revenue                                                  8,700

                         Discount on Notes Receivable                         1,100

                         (To record sales note receivable in exchange for sale.)  

                         Cost of Goods Sold                  5,220

                         Inventory                                                          5,220

                         (To record cost of goods sold.)                                      

b. How much total revenue should be recognized in 2020?

This cam be calculated as follows:

Sales revenue = Fair value of the goods = $8,700

Interest revenue = Face value of the note - Fair value of the goods = $9,800 - $8,700 = $1,100

Total Revenue =  sales revenue + interest revenue = $8,700 + $1,100 = $9,800

Therefore, the amount of total revenue that should be recognized in 2020 is $9,800.