Question

Hollingsworth Company issues a $25,000, 3-year zero-interest bearing note to Welton Corp. on January 1, 2014. Cash proceeds on the date of issue were $22,225.

a. What is the journal entry to record the issuance of note?
b. Journal entry to record interest expense on Dec. 31, 2014?

Answer 1

The journal entry to record the issuance of a zero-interest bearing note is Notes Payable $25,000, Discount on Notes Payable $2,775, Cash $22,225. The journal entry to record interest expense on Dec. 31, 2014 is Interest Expense $555, Discount on Notes Payable - $555.

Step-by-step explanation:

a. The journal entry to record the issuance of note is:

Jan 1, 2014

Notes Payable $25,000

Discount on Notes Payable $2,775

Cash $22,225

Note: The difference between the face value of the note and the cash proceeds is recorded as a discount on notes payable, which is amortized over the life of the note and recorded as interest expense.

b. The journal entry to record interest expense on Dec. 31, 2014 is:

Dec 31, 2014

Interest Expense $555

Discount on Notes Payable - $555

Note: The discount on notes payable is being amortized over the life of the note. Each year, a portion of the discount is recorded as interest expense.