Epsilon Ltd. accepted a $600,000 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 2%, and the principal was due at the end of 20X6.

Required:

1. Assume that the market interest rate is 7%. Calculate the present value of the note, and prepare a schedule that shows the annual interest using the straight line method of amortization.

2. Prepare journal entries to record the initial sale transaction and each payment on the books of Epsilon, consistent with requirement 1. Use the gross method to record the note.

3. Prepare a schedule that shows the annual interest using the effective interest method of amortization.

4. Compare interest revenue as calculated in requirements 1 and 3. Which is more accurate? Explain. What method(s) are permitted under ASPE? IFRS?