Problem 1

The unadjusted notes receivable balance as at December 31, 20x5 is $3,163,059. During

20x5, two notes receivable were created:

$2,000,000 Sale of inventory on January 2, 20x5 on the following terms:

interest of 2% payable on December 31 of each year for three

years with the principal amount of $2,000,000 payable on

December 31, 20x7. The cash price of the inventory would have

been $1,786,000. The entry to record the transaction was to debit

Notes Receivable and credit revenue. The interest payment of

$40,000 was received on December 31 and credited to revenue.

$1,500,000 Sale of inventory on January 2, 20x5 on the following terms:

blended payments of principal and interest of 4% over 5 years

with the first payment due on December 31, 20x5. The

customer's incremental borrowing rate is 8%. Floyd's

incremental borrowing rate is 6%. The entry to record the initial

transaction was to debit Notes Receivable and credit revenue for

$1,500,000. The first payment was received at year-end and was

credited to the Notes Receivable Account.

Required - Prepare the adjusting journal entries to adjust the notes receivable/revenue

accounts at December 31, 20x5.