QUESTION 2 (21 marks)
On December 31, 2020, Selling Company Inc. (SCI) sold product to Buying Company Ltd (BCL), accepting a 3%, four-year (4-year)
promissory note of $400,000 in exchange. Interest is payable annually on December 31, starting December 31, 2021. SCI normally
pays 6% interest to borrow funds. BCL, however, normally pays 8% to borrow funds. The product sold is carried on SCI's books at a
manufactured cost of $255,000. Assume SCI uses the perpetual inventory system.
PART I
REQUIRED: Prepare the required journal entries for SCI to record the transaction at December 31, 2020. Assume that the effective
interest method is used and round all values to the nearest dollar. For each component of the journal entries, clearly state whether
the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For
example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. (7 marks)
PART II
REQUIRED: Prepare all required journal entries for 2021 (for SCI) relating to the sale. For each component of the journal entries,
clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other
comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. (4 marks)
PART III
REQUIRED: Prepare all required journal entries for 2024 (for SCI) relating to the sale. For each component of the journal entries,
clearly state whether the entry (dr/cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other
comprehensive income (OCI). For example, Dr. Cash (B/S) $30; Cr. Revenue (I/S) $10. (4 marks)