Cambria Limited took a $ 250,000 two- year note receivable from a customer in connection with a major inventory sale transaction on 1 January 20X5. The note required annual end- of- year interest payments of 4%, and the principal was due at the end of 20X6.

Required:

1. Prepare journal entries to record the initial sale transaction and each payment on the books of Cambria, assuming that the market interest rate is 4%.

2. Assume now that the market interest rate is 8%. Calculate the present value of the note, and prepare a schedule that shows the annual interest.

3. Prepare journal entries to record the initial sale transaction and each payment on the books of Cambria, consistent with requirement 2. Use the gross method to record the note.

4. What accounts are different between requirements 1 and 3? Explain.

5. Prepare journal entries to record the initial sale transaction and each payment on the books of the customer who bought inventory and owes the note, consistent with requirement 2.