Question

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.)

Answer 1

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

Step-by-step 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