Question

On January 1, a company issues a $150,000, 5%, five-year note. The market rate for the note is 8%. Which journal entry correctly records the issuance of this note?

Answer 1

The Journal entry correctly records the issuance of this note is as follow:

Date Account Titles Debit Credit

Cash $132,032.33

Discount on notes payable $17,967.67

Notes payable $150,000.00

Amount PV factor at 8% Present value

Annual interest 7500 3.99271 29945.33

Principal 150000 0.68058 102087.00

Total 132032.33

Workings

- Annual interest = 150000*5% = 7500

- PV factor 8%

Annual interest = (1-(1.08)^-5)/0.08 = 3.99271

Principal = 1/1.08^5 = 0.68058