On June 30, 2021, the Esquire Company sold merchandise to a customer and accepted a noninterest-bearing note in exchange. The note requires payment of $40,000 on March 31, 2022. The fair value of the merchandise exchanged is $37,600. Esquire views the financing component of this contract as significant. Required: 1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any December 31, 2021 interest accrual, and the March 31, 2022 collection. 2. What is the effective interest rate on the note

1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), any December 31, 2021 interest accrual, and the March 31, 2022 collection.

June 30, 2021, merchandise sold in exchange for note receivable

Dr Notes receivable 40,000

    Cr Sales revenue 37,600

    Cr Unearned interest revenue 2,400

December 31, 2021, accrued interests (= $2,400 x 6/9)

Dr Unearned interest revenue 1,600

    Cr Interest revenue 1,600

March 31, 2022, note receivable is collected

Dr Cash 40,000

    Cr Note receivable 40,000

Dr Unearned interest revenue 800

    Cr Interest revenue 800

2. What is the effective interest rate on the note

effective period rate = $2,400 / $37,600 = 6.3829% (for 9 months)

annual rate = 6.3829% x 12/9 = 8.51%

answer; buying the bill at a discount from the face value to be received at maturity;