On January 1, 2019, Merck Manufacturing borrowed and received $2,000,000 from one of its major

customers, Felix Innovations by signing a zero-interest bearing note with a maturity value of

$2,000,000 due in five years. The appropriate rate of interest applicable to this note (based on prime

interest rate, borrower's credit rating and general market interest rate of similar note) is 6%. As a

consideration, Merck agrees to sell inventories to Felix during the loan period of five years at a price

lower than the prevailing market price of inventories.

1. Prepare the journal entry in Merck's book to record the initial borrowing transaction on January 1,

2019. Show your supporting calculations.

2. What will be the price adjustment for Felix Innovations each year over the five-year period?