Final answer:
To record the issuance of the 45-day note for $80,000, discounted at 5%, the journal entry would include debiting Cash for $79,500, debiting Interest Expense for $500, and crediting Notes Payable for $80,000.
Step-by-step explanation:
The issuance of a 45-day note for $80,000 by a business, which is discounted at an interest rate of 5%, is a financial transaction that can be used to explain present value calculations. To journalize this entry, we first need to calculate the interest expense and the actual amount received by the company after the interest discount.
The interest on the note for 45 days (assuming a 360-day year) can be calculated as follows:
- Interest = Principal × Rate × Time = $80,000 × 5% × (45/360) = $500.
The amount received is the principal minus the interest: $80,000 - $500 = $79,500. Now we can journalize the transaction.
Dr. Cash $79,500
Dr. Interest Expense $500
Cr. Notes Payable $80,000
Note that interest expense is recorded because the business is effectively 'paying' the interest upfront by receiving less cash than the face value of the note. This entry recognizes the liability (Notes Payable) for the full amount borrowed and also records the expense associated with issuing the note.