On 1 July 2013 Bryson Ltd sells a machine to Adams Ltd in exchange for a promissory note that requires Adams Ltd to make five payments of $8000,the first to be made on 30 June 2014.The machine cost Bryson Ltd $20 000 to manufacture.Bryson Ltd would normally sell this type of machine for $30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the net-interest method?

Question

Quizplus · Accepted Answer

Under the net-interest method, the revenue from the sale is recognized as the present value of the promissory note. The appropriate journal entry to record the sale agreement is:

Debit: Promissory note receivable - Present value of payments ($31,079)
Credit: Machinery ($20,000)
Credit: Sales revenue ($11,079)

To record the first installment, the following journal entry is made:

Debit: Cash ($8,000)
Debit: Unamortized discount on note ($958)
Credit: Promissory note receivable ($7,042)

To record the second installment, the following journal entry is made:

Debit: Cash ($8,000)
Debit: Unamortized discount on note ($1,003)
Credit: Promissory note receivable ($6,997)

Option A is incorrect because it does not reflect the present value of the promissory note. Option C is incorrect because it uses the gross-profit method, not the net-interest method. Option D is incorrect because it does not take into account the unamortized discount on the note.

On 1 July 2013 Bryson Ltd Sells a Machine to Adams