Chen Inc. accepted a two-year noninterest-bearing note for $605,000 on January 1, 2021. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%. The cash collection on December 31, 2022, would be recorded as:

Debit: Discount on note receivable with $55,000

Debit: Cash with $605,000

Credit: Note receivable with $605,000

Credit: Interest revenue with $55,000

Explanation:

Step 1: Calculation of discount on note receivable and interest revenue

Excess of note value over merchandise value = Note value - Merchandise with a fair value

= $605,000 - $500,000

Excess of note value over merchandise value = $105,000

Interest on merchandise = $500,000 * 10% = $50,000

Discount on note receivable = $105,000 - $50,000 = $55,000

This amount of $55,000 is also an interest revenue.

Step 2: Recording of the cash collection on December 31, 2022.

DR ($) CR ($)

Discount on note receivable 55,000

Cash 605,000

Note receivable 605,000

Interest revenue 55,000

Being the record of the cash collection on December 31, 2022.