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Frank Ricard Inc. sells inventory on January 1st 2020 in exchange for a $2,000 note, due in 2 years (i.e., zero interest bearing). The effective interest rate for this note is 10 percent.
1. Prepare all journal entries related to note and any related interest from January 1st, through the repayment on January 1st 2022.

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Answer:

January 1st, 2020. The journal entry to record the note:

Dr Notes receivable 2,000

    Cr Merchandise inventory 1,653

    Cr Interest income 347

January 1st, 2022. The journal entry to record the collection of the note:

Dr Cash 2,000

    Cr Notes receivable 2,000

Explanation:

You mus first determine the present value of the note = $2,000 / 1.1² = $1,653,

so the imputed interest = $2,000 - $1,653 = $347

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