Question

Issued, on January 01, 2010, a four-year note to ABC Bank. Face value of note is $40,000. It is a 5% note discounted at 8% Prepare all relevant journal entries and schedules

Answer 1

To record the issuance and discounting of the note, debit Notes Payable and credit Cash. Use journal entries to record the interest expense and schedule the interest expense over the four-year period.

Step-by-step explanation:

To record the issuance of the note:

1. Debit Notes Payable $40,000
2. Credit Cash $40,000

To record the discounting of the note:

1. Debit Interest Expense $1,600 ($40,000 x 4 years x 0.04)
2. Debit Discount on Notes Payable $6,400 ($40,000 x 0.08)
3. Credit Notes Payable $40,000
4. Credit Cash $32,000 ($40,000 - $8,000)

To record the interest expense:

1. Debit Interest Expense $4,000 ($40,000 x 0.05)
2. Credit Interest Payable $4,000

The journal entries for the relevant transactions have been provided above.

The schedule of interest expense over the four-year period would be as follows:

Year Interest Expense1$4,0002$4,0003$4,0004$4,000