Question

Lyric Company issued a 90-day zero-interest bearing note with a face amount of $3,000. The present value of the note is $2,855. The journal entry to record the insurance of the note will include

A. a credit to Notes Payable for $2,855.
B. a debit to Interest Expense for $145.
C. a debit to Cash for $2,855.
D. None of these answers are correct.

Answer 1

The journal entry to record the issuance of the zero-interest bearing note would include a credit to Notes Payable for $2,855.

Step-by-step explanation:

The journal entry to record the issuance of the zero-interest bearing note would include a credit to Notes Payable for $2,855 (option A).

When a company issues a zero-interest bearing note, the present value of the note represents the amount that the company is actually borrowing. In this case, the present value of the note is $2,855. By issuing the note, the company is increasing its liabilities and therefore, the Notes Payable account should be credited.

The other options are incorrect. There is no interest expense to record since the note is zero-interest bearing (option B). There is no cash inflow or outflow at the time of issuance (option C). Lastly, none of the given options are correct (option D).