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

exercise 7-20 (algo) noninterest - bearing notes receivable lo7-7\non 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.\nrequired:\n1. 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.\n2. what is the effective interest rate on the note?\ncomplete this question by entering your answers in the tabs below.\nrequired 1 required 2\nprepare 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.\nnote: if no entry is required for a transaction/event, select \no journal entry required\ in the first account field. do not round intermediate calculations.\nshow less ▲\nview transaction list\njournal entry worksheet\n1 2 3 4\nrecord the sale of merchandise.\nnote: enter debits before credits.

exercise 7-20 (algo) noninterest - bearing notes receivable lo7-7\non 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.\nrequired:\n1. 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.\n2. what is the effective interest rate on the note?\ncomplete this question by entering your answers in the tabs below.\nrequired 1 required 2\nprepare 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.\nnote: if no entry is required for a transaction/event, select \no journal entry required\ in the first account field. do not round intermediate calculations.\nshow less ▲\nview transaction list\njournal entry worksheet\n1 2 3 4\nrecord the sale of merchandise.\nnote: enter debits before credits.

Answer

Explanation:

Step1: Record the sale on June 30, 2024

Debit Notes Receivable $46,000; Credit Sales Revenue $41,860, Credit Discount on Notes Receivable ($46,000 - $41,860) = $4,140.

Step2: Accrue interest on December 31, 2024

The time from June 30, 2024 to December 31, 2024 is 6 months. Let the effective - interest rate be $r$. First, we need to find $r$ in part 2. But for the accrual, we know the carrying value of the note at the start is $41,860. Assume the effective - interest rate is calculated for the whole period from June 30, 2024 to March 31, 2025 (9 months). Let's find the monthly interest rate $i$. The future value $FV = 46,000$, present value $PV=41,860$. For 9 months, $FV = PV(1 + 9i)$. So, $i=\frac{46000 - 41860}{41860\times9}$. For 6 months, the interest revenue $I = 41860\times6i$. $I=\frac{46000 - 41860}{9}\times\frac{6}{1}=2760$. Debit Interest Receivable $2,760; Credit Interest Revenue $2,760.

Step3: Record the collection on March 31, 2025

Debit Cash $46,000; Credit Notes Receivable $46,000, Credit Interest Receivable $2,760, Credit Interest Revenue ($4,140 - $2,760) = $1,380.

Step4: Calculate the effective - interest rate

The time from June 30, 2024 to March 31, 2025 is 9 months or $\frac{9}{12}=\frac{3}{4}$ years. We know that $PV = 41,860$, $FV = 46,000$. Using the formula $FV=PV(1 + rt)$ (where $r$ is the annual interest rate and $t$ is the time in years), we have $46000 = 41860(1 + r\times\frac{3}{4})$. First, $\frac{46000}{41860}=1 + r\times\frac{3}{4}$. $1.108457 = 1+\frac{3r}{4}$. $\frac{3r}{4}=1.108457 - 1=0.108457$. $r=\frac{0.108457\times4}{3}\approx0.1446 = 14.46%$.

Answer:

Required 1:

Date Account Titles and Explanation Debit Credit
June 30, 2024 Notes Receivable $46,000
Sales Revenue $41,860
Discount on Notes Receivable $4,140
December 31, 2024 Interest Receivable $2,760
Interest Revenue $2,760
March 31, 2025 Cash $46,000
Notes Receivable $46,000
Interest Receivable $2,760
Interest Revenue $1,380

Required 2: The effective interest rate on the note is approximately $14.46%$.