exercise 7-20 (algo) noninterest - bearing notes receivable lo7-7 on june 30, 2024, the esquire company sold…

exercise 7-20 (algo) noninterest - bearing notes receivable lo7-7 on june 30, 2024, the esquire company sold merchandise to a customer and accepted a noninterest - bearing note in exchange. the note requires payment of $46,000 on march 31, 2025. the fair value of the merchandise exchanged is $41,860. esquire views the financing component of this contract as significant. required: 1. prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any december 31, 2024 interest accrual, and the march 31, 2025 collection. 2. what is the effective interest rate on the note? complete this question by entering your answers in the tabs below. required 1 required 2 what is the effective interest rate on the note? note: round your intermediate calculations and the final percentage answer to 3 decimal places. effective interest rate % < previous next >

exercise 7-20 (algo) noninterest - bearing notes receivable lo7-7 on june 30, 2024, the esquire company sold merchandise to a customer and accepted a noninterest - bearing note in exchange. the note requires payment of $46,000 on march 31, 2025. the fair value of the merchandise exchanged is $41,860. esquire views the financing component of this contract as significant. required: 1. prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any december 31, 2024 interest accrual, and the march 31, 2025 collection. 2. what is the effective interest rate on the note? complete this question by entering your answers in the tabs below. required 1 required 2 what is the effective interest rate on the note? note: round your intermediate calculations and the final percentage answer to 3 decimal places. effective interest rate % < previous next >

Answer

Explanation:

Step1: Determine the interest amount

The face - value of the note is $F = 46000$ and the fair value of the merchandise (present value) is $P=41860$. The interest amount $I=F - P=46000 - 41860 = 4140$.

Step2: Calculate the time period

The note is issued on June 30, 2024, and due on March 31, 2025. The time period $t$ in years: From June 30, 2024, to March 31, 2025, is 9 months or $t=\frac{9}{12}=0.75$ years.

Step3: Use the simple - interest formula $I = P\times r\times t$ to find the interest rate $r$

We know $I = 4140$, $P = 41860$, and $t=0.75$. Rearranging the formula $r=\frac{I}{P\times t}$. Substitute the values: $r=\frac{4140}{41860\times0.75}$. $r=\frac{4140}{31395}\approx0.132$.

Answer:

13.200%

Journal entries for Required 1:

  • June 30, 2024 (Sale of merchandise):
    • Debit: Notes Receivable $46000$
    • Credit: Sales Revenue $41860$
    • Credit: Discount on Notes Receivable $4140$
  • December 31, 2024 (Interest accrual): The time from June 30, 2024, to December 31, 2024, is 6 months or $t_1=\frac{6}{12}=0.5$ years. The interest revenue $I_1 = 41860\times r\times0.5$, where $r$ is the effective interest rate. Since $r=\frac{4140}{41860\times0.75}$, $I_1=41860\times\frac{4140}{41860\times0.75}\times0.5=\frac{4140}{0.75}\times0.5 = 2760$.
    • Debit: Discount on Notes Receivable $2760$
    • Credit: Interest Revenue $2760$
  • March 31, 2025 (Collection): The remaining interest revenue $I_2=4140 - 2760 = 1380$.
    • Debit: Cash $46000$
    • Credit: Notes Receivable $46000$
    • Debit: Discount on Notes Receivable $1380$
    • Credit: Interest Revenue $1380$