Question

Qurestion: Shlee Corporation issued a 4-year, \(60,000, zero-interest-bearing note to Garcia Company on January 1, 2017, and received cash of \)60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-year period. The market rate of interest for similar notes is 12%. Prepare Shlee Corporation’s January 1 journal entry

Short answer

Answer

Discount on note payable is $21,869

Step-by-step solution

Meaning of Journal entry

A journal entry is a record of financial transactions kept in the books of accounts of an organization. There are debit and credit columns in addition to each transaction.

Preparing Journal entry

Date	Particulars	Debit ($)	Credit ($)
	Cash	60,000
	Discount on notes payable	21,869
	Note payable		60,000
	Unearned sales revenue		21,869

Working notes:

Calculation of discount on notes payable:

$$\begin{gathered} \text{Present}\text{value}\text{of}\text{note}=\text{Face}\text{value}\text{of}\text{note}\times \text{PVF}@12\%\text{for}{4}^{\text{th}}\text{period} \\ \text{= \$ 60,000}\times \text{0.635518} \\ \text{= \$ 38,131} \\ \text{Discount}\text{on}\text{note}\text{payable}=\text{Face}\text{value}\text{of}\text{note}-\text{Present}\text{value}\text{of}\text{note} \\ =\$60,000-\$38,131 \\ =\$21,869 \end{gathered}$$