Sand Castle Co

Essay

Sand Castle Co. borrowed $40,000 by issuing a four-year non-interest-bearing note to a customer. In addition, Sand Castle agreed to sell inventory to the same customer at reduced prices over the four-year period. Sand Castle's incremental borrowing rate was 8%, so the present value of the note was $29,400. The customer agreed to purchase an equal amount of inventory each year over the four-year period.
Required:
Prepare journal entries to:
a. Issue the note
b. Adjust at the end of the first year
c. Adjust at the end of the second year