Suppose that you are starting counseling practice as a new business. You need a nice, comfortable sofa for clients who come to see you to sit on. You visit Wolf Furniture during their latest promotional sale. You find just the kind of sofa you are looking for - leather and everything. However, the sticker price is a whopping $2,995. Never fear the salesman tells you, with your good credit you can buy the sofa now and not pay the $2,995 until 3 years from the date of purchase. He says there will be no interest.

A bank loan to buy the sofa would cost 6% per year.

Questions:

1. What cost should you use to record the sofa when you purchase it without paying any cash?

2. How would you calculate depreciation for the first year on the sofa if it will last 10 years and have no salvage value? You use the straight-line method and the half year convention.

3. What would the journal entry be to record interest on the loan from Wolf Furniture after one year?

4. What would the journal entry be to record interest on the loan from Wolf Furniture after two years?

5. How much revenue should Wolf Furniture record when they sell you the sofa without receiving any cash?