Final answer:
The question asks to record the issuance of a zero-interest-bearing note at a discount, the monthly interest expense, and the note's payoff. These transactions involve debiting and crediting accounts such as Cash, Notes Payable, Discount on Notes Payable, and Interest Expense over the note's term.
Step-by-step explanation:
The question pertains to recording a zero-interest-bearing note issued by a company and the subsequent accounting entries that should be made. Initially, the company, Lakota, issues the note to Salem National Bank on a discounted basis, with a discount rate of 12%. Consequently, Salem National Bank would record this loan as an asset on its balance sheet. To record the transaction, a journal entry is made to account for the cash received and the note payable, factoring in the discount. As for the interest expense, it's accounted for each month and the payoff of the note occurs at the end of the six-month term.
At issuance, Lakota's entry would be to debit Cash and discount on notes payable and credit Notes payable for the respective amounts. The monthly interest expense is recorded by debiting Interest Expense and crediting Discount on Notes Payable to represent the amortization of the discount over time, which effectively acts as the interest expense for the note. At maturity, Lakota would debit Notes Payable and credit Cash for the face value of the note, completing the payoff.