The Bean Company makes a sale with an invoice price of $97,000 on 10/1/14. The note is due on 10/1/17. There is no interest rate stated in the note. The market rate for similar notes is 10%. Assume annual compounding of interest. Prepare the journal entries for 10/1/14, 12/31/14, 10/1/15, and 12/31/15.
Do I need to calculate the future value of the $97,000, or just add the interest revenue and interest receivable to the principal yearly?
To prepare the journal entries for each date, you need to calculate the interest revenue and interest receivable based on the principal amount, the annual interest rate, and the compounding period.
In this case, since the note does not specify an interest rate, you will need to use the market rate of 10% as provided.
Here's how you can calculate the interest revenue and interest receivable for each period:
1. Date: 10/1/14 (Initially)
On this date, Bean Company makes a sale with an invoice price of $97,000. To record the sale, you would make the following journal entry:
Debit Accounts Receivable $97,000
Credit Sales Revenue $97,000
2. Date: 12/31/14 (End of the year)
To calculate the interest revenue and interest receivable for the first year, you need to determine the interest for the period of 10/1/14 to 12/31/14. Here's how you do it:
Principal Amount: $97,000
Interest Rate: 10%
Time Period: 92 days (October 1 to December 31)
Interest = Principal Amount x Interest Rate x Time Period/365
Interest = $97,000 x 10% x 92/365
Interest = $2,380.82 (approximately)
Now, you can record the journal entry for this period:
Debit Interest Receivable $2,380.82
Credit Interest Revenue $2,380.82
3. Date: 10/1/15 (End of the second year)
To calculate the interest revenue and interest receivable for the second year, you need to determine the interest for the period of 10/1/14 to 10/1/15. Since this is a full year, the time period is 1 year. Here's how you calculate it:
Interest = Principal Amount x Interest Rate
Interest = $97,000 x 10%
Interest = $9,700
Now, record the journal entry for this period:
Debit Interest Receivable $9,700
Credit Interest Revenue $9,700
4. Date: 12/31/15 (End of the second year)
To calculate the interest revenue and interest receivable for the second year, you need to determine the interest for the period of 10/1/15 to 12/31/15. Here's how you calculate it:
Time Period: 92 days (October 1 to December 31)
Interest = Principal Amount x Interest Rate x Time Period/365
Interest = $97,000 x 10% x 92/365
Interest = $2,380.82 (approximately)
Now, record the journal entry for this period:
Debit Interest Receivable $2,380.82
Credit Interest Revenue $2,380.82
Note: You do not need to calculate the future value of $97,000 because the note does not specify any interest or compounding. The interest revenue and interest receivable can be added to the principal amount yearly based on the calculations above.