Final answer:
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.