On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On January 1, when Song receives the note from the customer, Song will record (Select all that apply.) Note: you must use present value computations to answer this questions. Textbook Answer

Note Receivable (debit) 100,000

Discount on Note Receivable (credit) 20,281

Sales Revenue (credit) 79,719

I know that Sales Revenue is the difference between the Note Receivable and the Discount on Note Receivable.

HOW DO YOU FIND THE DISCOUNT ON NOTE RECEIVABLE FOR THIS QUESTION USING THE TVM BUTTONS ON A FINANCIAL CALCULATOR? Please provide the exact input and then the reason why.

N =

I/Y =

PV =

PMT =

FV =

Song Corp

1. Correct Journal Entries for the transaction:

Debit Note Receivable $100,000

Credit Interest on Note Receivable $20,281

Credit Sales Revenue $79,719

To record the sale of goods with a 12% note receivable.

2. Explanation of how the discount (Interest) on the Note Receivable was found:

The first button to select on the Calculator is the "Starting Principal," because this is the variable of interest.

The inputs on the TVM buttons were the $100,000 on the FV, $0 on the PMT, 2 on the N, and 12 on the I/Y buttons.  These inputs then calculated the value of PV as $79,719 and Interest as $20,281 approximately when I pressed the "Calculate" button.

N = Number of Periods = 2 years

I/Y = Interest Rate = Effective Interest Rate of 12%

PV = Calculated Value (Present Value of the sales transaction = $79,719)

PMT = Periodic Monthly Payments made to settle the debt = $0.

FV = Future value of the note = $100,000

Total Interest = $20,281

Explanation:

The present value of the sales transaction, which Song Corp. contracted with a customer is $79,719. This is the amount that would have the future value of $100,000.00 for the note receivable from the customer, with an effective interest rate of 12% per annum after 2 years.

The difference between the future value of $100,000 and the present value of $79,719 represents the interest cost, which the customer bears for the note receivable.

However, it is important to stress that this difference is not described as a "Discount on Note Receivable" as depicted in this question, but as an "Interest on Note Receivable."  A discount on note receivable would have had a debit balance.

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