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27 November, 08:28

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:

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  1. 27 November, 11:38
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    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.
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