On 1 January 20X5, Spencer Inc. sold merchandise ( cost, $ 8,000; sales value, $ 14,000) to Bryden, Inc. and received a non- interest- bearing note in return. The note requires $ 15,730 to be paid in a lump sum on 31 December 20X6. In February 20X6, Bryden requested that the terms of the note be modified so that the $ 15,730 payment be paid at the end of 20X11. Spencer refused Bryden’s request. During 20X6, however, news of Bryden’s deteriorating financial condition prompted Spencer to reevaluate the collectability of the note. Consequently, the modified terms requested by Bryden were accepted as of 31 December 20X6.

1. Prepare the entry to record the sale by Spencer, assuming a perpetual inventory system. Also prepare the 31 December 20X5 adjusting entry. Use the net method. You will need to establish the interest rate implicit in the original note.
2. Prepare the entry to record the impairment on 31 December 20X6. (Compare the book value of the note at 31 December 20X6 with the present value of the newly acknowledged cash flow stream using the same interest rate as in requirement 1. No interest revenue is accrued in 20X6.)

  • CreatedFebruary 17, 2015
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