Exhibit 14-16
Harry's Inc. issued a four-year, $75,000, non-interest-bearing note to a customer on January 1, 2016. Harry also agrees to sell inventory to the customer at reduced rates over a five-year period. Sales are to be evenly spread over the five-year period. Harry's incremental interest rate is 8%, and the present value of the note is $55,125.
-Refer to Exhibit 14-16.What is Harry's sales revenue connected with the note in 2018 ?

Question

Quizplus · Accepted Answer

The sales revenue connected with the note in 2018 is calculated by first determining the annual sales revenue from the note, which is the present value of the note ($55,125) divided by the five-year period, resulting in $11,025 per year. Since the question asks for the sales revenue in 2018 specifically, and the sales are evenly spread over the five-year period, the annual figure is used directly. However, the correct calculation involves recognizing the interest component to find the actual sales revenue. The interest for the year is calculated on the outstanding balance of the note, which decreases as the principal is effectively repaid through the sales. The discrepancy in the answer choices suggests a misunderstanding of the calculation method, but the correct approach involves adjusting for the interest effect on the note's carrying amount to find the portion of the payment that counts as sales revenue. Given the options, none directly reflect the correct calculation for sales revenue from a note, which typically involves interest and principal considerations. The correct answer choice, based on the provided options, involves recognizing that there is a specific calculation error or misunderstanding in the question setup.

Exhibit 14-16 Harry's Inc. Issued a Four-Year, $75,000, Non-Interest-Bearing Note to a to a Customer