On August 1, 2018, McLaren Inc. sold inventory to Klondike Company and received Klondikes 9-month, noninterestbearing $100,000 note due April 30, 2019. The cost of the inventory was $60,000. The discount rate was 8%. McLaren records adjusting entries annually at December 31.

a. Record the August 1, 2018, journal entry for McLaren.

b. If McLaren recorded the note as an interest-bearing note on August 1, 2018, (i.e., did not record a discount on the note), how would the financial statements be misstated (overstated/understated and $ amount)?. (Hint: Record the entry without the discount and compare to your answer in part a.)

ASSETS LIABILITIES SE 2018 NET INCOME

$ $ $ $

Overstated Overstated Overstated Overstated

Understated Understated Understated Understated

c. Record the December 31, 2018, adjusting entry for McLaren.

d. If McLaren 2018 net income without including the Aug. 1 sale or December 31 adjusting entry was $200,000, what is the correct 2018 net income? Ignore taxes.

e. What amounts related to the note will McLaren report on its 2018 balance sheet?

f. Record the April 30, 2019, journal entry(ies) for McLaren.