Drebin Security Systems sold merchandise to a customer in exchange for a $50,000, five-year, noninterest-bearing note when an equivalent loan would carry 10% interest. Drebin would record sales revenue on the date of sale equal to:

Question

Quizplus · Accepted Answer

The amount of sales revenue recorded should be the present value of the note since it is a noninterest-bearing note. This means that the customer is effectively borrowing money from Drebin at an interest rate of 0%, which is lower than the market interest rate of 10%. Therefore, Drebin should record sales revenue at a discounted amount, which is the present value of the note. The present value of a $50,000, 5-year note at a 10% interest rate would be approximately $31,178.

Drebin Security Systems Sold Merchandise to a Customer in Exchange