On 1 July 2013 Bigwell Ltd sells a machine to Archer Ltd in exchange for a promissory note that requires Archer Ltd to make five payments of $8000,the first to be made on 30 June 2014.The machine cost Bigwell Ltd $20 000 to manufacture.Bigwell Ltd would normally sell this type of machine for $30 326 for cash or short-term credit.The implicit interest rate in the agreement is 10%.What are the appropriate journal entries to record the sale agreement and the first two instalments using the gross method?

Question

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To record the sale agreement:
Debit: Promissory note receivable - $30,326
Credit: Machinery - $20,000
Credit: Sales revenue - $10,326

To record the first two instalments:
Debit: Cash - $8,000 x 2 = $16,000
Credit: Promissory note receivable - $8,000 x 2 = $16,000

The gross method means that the sales revenue is recorded at the full invoice amount, and the interest income is recognized over the life of the promissory note. Therefore, there is no need to record any interest income at the time of each payment. The journal entries in option C reflect this treatment.

On 1 July 2013 Bigwell Ltd Sells a Machine to Archer