Final answer:
The correct entry for issuing a note when the stated rate and market rate differ depends on whether the note was issued at a discount or a premium, leading to an adjustment in notes payable, cash, and either Discount on Notes Payable or Premium on Notes Payable.
Step-by-step explanation:
When the stated rate does not equal the market rate at the date of issuance, the entry to record the issuance of the note will depend on whether the note was issued at a discount or a premium. If the market rate is higher than the stated rate, the note is issued at a discount. In this situation, the correct journal entry includes a Debit to Notes Payable for the face value of the note, a Credit to Cash for the amount of cash received, and a Debit to Discount on Notes Payable for the difference between the note's face value and the cash received. This represents the interest cost that will be recognized over the life of the note. If the stated rate is higher than the market rate, the note would be issued at a premium, which requires a Credit to Premium on Notes Payable for the difference between the cash received and the face value of the note. This premium will be recognized as an adjustment to interest expense over the life of the note.