U-Build It Warehouse issues a 45-day note for $800,000 to Thomson Home Furnishin

Question

U-Build It Warehouse issues a 45-day note for $800,000 to Thomson Home Furnishings Co. for merchandise inventory. Thomson Home Furnishings Co. discounts the note at 7%.

For a compound transaction, if an amount box does not require an entry, leave it blank.

a. Journalize U-Build It Warehouse's entries to record: (1) the issuance of the note and (2) the payment of the note at maturity.


Account Debit Credit

1. Merch. inventory
Interest Expense
Notes Payable
2.Notes Payable
Cash


b. Journalize Thomson Home Furnishings Co.'s entries to record: (1) the receipt of the note and (2) the receipt of the payment of the note at maturity.


Account Debit Credit
1. Notes Receivables
Sales
Interest Revenue
2.Cash
Notes Receivables

Explanation / Answer

a.)Assuming I understand the question right, the Note is for $800K including interest. In that case the Present Value of the Note is $793,061, using the PV function in Excel, you select 0.07/8 (the 8 is 360/45 days), the Nper is 1 and the FV is $800,000. Therefore, the entries are as follows 1. Merch. inventory 793,061 Interest Expense 6,939 Notes Payable 800,000 2.Notes Payable 800,000 Cash 800,000 b.) 1. Notes Receivables 800,000 Sales 793,061 Interest Revenue 6,939 2.Cash 800,000 Notes Receivables 800,000

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