Question

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2017 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Assuming Greeson used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2017 will include a

a. debit to Discount on Note Payable for $2,600.
b. debit to Interest Expense for $5,200.
c. credit to Discount on Note Payable for $2,600.
d. credit to Interest Expense for $5,200.

Answer 1

The adjusting entry for Greeson Corp's note on December 31, 2017, will include a debit to Interest Expense for $2,600 and a credit to Discount on Note Payable for $2,600. This reflects the monthly amortization of the discount over the three-month term of the note.

Step-by-step explanation:

To address the student's question regarding Greeson Corp's note, we'll need to calculate the discount on the note and how it's amortized. Given that the face value of the note is $507,800 and Greeson Corp signed it for $500,000, the total discount on the note is $7,800 ($507,800 face value - $500,000 cash received). The discount is amortized over the three-month period, which means dividing the total discount by three to determine the monthly amortization amount.

The monthly amortization amount is $2,600 ($7,800 total discount ÷ 3 months). Hence, at the end of December, one month into the note's term, Greeson Corp would record an adjusting entry that includes a debit to Interest Expense for $2,600, which represents the expense of the note for that month, and a credit to Discount on Note Payable for $2,600, reducing the discount on the note payable accordingly.

The correct answer to the question would be c. credit to Discount on Note Payable for $2,600.