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5 August, 11:00

McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1, 2017, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick's journal entries for (a) the January 1 issuance and (b) the December 31 interest. (Round answers to 0 decimal places, e. g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

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  1. 5 August, 12:20
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    computer 31,495 debit

    discount on note payable 8,505 debit

    note payable 40,000 credit

    interest expense 3,779.4 debit

    discount on note payable 1,799.4 credit

    cash 2,000 credit

    Explanation:

    market value of the computer: 31,495

    market rate: 12%

    We will treat the difference between the note and the fair market as as a discount and calcualte the interest expense with the effective interest-rate method.

    40,000 x 5% = 2,000 cash procceds

    31,495 x 12% = 3.779,4‬ interest expense

    amortizaton 1,779.4
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