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Assume adjusting entries are made annually.

1. On January 1, 2018 Leons Inc. delivers a set of kitchen appliances to a customer. The customer will pay $1000 a year for 5 years on December 31 of each year. This customer would normally be subject to 4% annual interest. The cost of the kitchen appliances bundle was $2000 to Leons.

Prepare the journal entries for Smith on the dates given. Show all calculations.

January 1, 2018
June 30, 2018 (year end)
Dec 31, 2018 (payment)

2. On Jan 1, 2018, We Paint Inc. sold and provided a house painting service to a customer under a special promotion: Dont pay for 2 years with only 2% interest paid each year!!.

The customer will pay $1000 Jan 1, 2020 for the services plus (2% interest per year) $20 each Dec 31.

However, the normal borrowing rate for this customer based on their risk profile would have been 6% (ie. the market rate).

Prepare the journal entries (assuming the effective interest method):

Jan 1, 2018: provided service to customer:

Dec 31, 2018: payment of interest and year end adjustments:

Dec 31, 2019: payment of interest and year end adjustments:

Jan 1, 2020, customer pays note:

What is the interest revenue for 2018?

What is the note receivable balance at Dec 31, 2018?

What is the note receivable balance at Dec 31, 2019?