C is corrent. ASC Topic 835 requires that the liability should be recorded at its present value by establishing a discount account. The difference between cash proceeds and the present value of the note is credited to an unearned income account, which is recognized as revenue as the agreement is fulfilled.| Cash | 200,000 | | | Discount on N/P | 65,000 | | | | 200,000 | | | 65,000 |
Interest expense is then recognized using the effective interest method. For year 2, interest expense is equal to the present value of the note ($135,000) times the effective interest rate (14%), or $18,900. The unearned income will be recognized as sales as the inventory is sold to Pine Corporation at favorable prices.A is incorrect. ASC Topic 835 requires that the liability should be recorded at its present value by establishing a discount account. The difference between cash proceeds and the present value of the note is credited to an unearned income account, which is recognized as revenue as the agreement is fulfilled.| Cash | 200,000 | | | Discount on N/P | 65,000 | | | | 200,000 | | | 65,000 |
Interest expense is then recognized using the effective interest method. For year 2, interest expense is equal to the present value of the note ($135,000) times the effective interest rate (14%), or $18,900. The unearned income will be recognized as sales as the inventory is sold to Pine Corporation at favorable prices.B is incorrect. ASC Topic 835 requires that the liability should be recorded at its present value by establishing a discount account. The difference between cash proceeds and the present value of the note is credited to an unearned income account, which is recognized as revenue as the agreement is fulfilled.| Cash | 200,000 | | | Discount on N/P | 65,000 | | | | 200,000 | | | 65,000 |
Interest expense is then recognized using the effective interest method. For year 2, interest expense is equal to the present value of the note ($135,000) times the effective interest rate (14%), or $18,900. The unearned income will be recognized as sales as the inventory is sold to Pine Corporation at favorable prices.D is incorrect. ASC Topic 835 requires that the liability should be recorded at its present value by establishing a discount account. The difference between cash proceeds and the present value of the note is credited to an unearned income account, which is recognized as revenue as the agreement is fulfilled.| Cash | 200,000 | | | Discount on N/P | 65,000 | | | | 200,000 | | | 65,000 |
Interest expense is then recognized using the effective interest method. For year 2, interest expense is equal to the present value of the note ($135,000) times the effective interest rate (14%), or $18,900. The unearned income will be recognized as sales as the inventory is sold to Pine Corporation at favorable prices. |
