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2 November, 14:42

Monty Corporation issued a 4-year, $32,000, 4% note to Greenbush Company on January 1, 2020, and received a computer that normally sells for $24,224. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%.

1. Prepare Monty's journal entries for (a) the January 1 issuance and (b) the December 31 interest

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  1. 2 November, 18:19
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    The journal entries are as follows:

    (a) Jan 1, 2020

    Computer A/c Dr. $24,224

    Discount on Note payable A/c Dr. $7,776

    To Note payable $32,000

    (To record issue of note at discount)

    (b) Dec 31, 2020

    Interest Expense $2,906.88

    To Cash $1,280

    To Amortization of Note discount $1,626.88

    (To record interest on note payable)

    Working note:

    Discount on note issued:

    = Issue price - Selling price of computer received

    = ($32,000 - $24,224)

    = $7,776

    Face value of note = $32,000, Book value of note = $24,224

    Interest payment, Dec 31:

    = Face value x Coupon rate

    = $32,000 x 4%

    = $1,280

    Interest expense, Dec 31:

    = Book value x Market rate

    = $24,224 x 12%

    = $2,906.88
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