Jole Co. lent $10,000 to a major supplier in exchange for a noninterest-bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next 3 years. The market rate for a note of this type is 10%. On issuing the note, Jole should record:

Discount on note receivable and deferred charge.

Explanation:

The present value of the notes receivable has to be recorded by Jole Co. The reason this should be recorded as discount on note receivable is that the $10,000 will not be paid immediately but will be due for payment 3 years from the date the note was issued.

A deferred charge is an expense paid in advance and it is recorded and carried forward yearly in the balance sheet as an asset until when it is totally consumed or used. The 10% discount received by Jole Co. in the exchange agreement is a payment in advance and it will be recorded by Jole Co. as deferred charge. The reason is that it is a discount on the future purchase from the supplier over the next three years of a given amount of merchandise from the market price list.

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