(Imputation of Interest with Right) On January 1, 2006, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions

(a) Prepare the journal entry to record the initial transaction on January 1, 2006. (Round all computations to the nearest dollar.)

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2006. Assume that the sales of Avery’s product to this customer occur evenly over the 3-year period.