Question

A business issued a 45-day note for $99,000 to a creditor on account. The note was discounted at 7%. Journalize the entries to record (a) the issuance of the note on March 1 and (b) the payment of the note at maturity. Assume a 360-day year.

Answer 1

A business issuing a 45-day note for $99,000 discounted at 7% results in a $1,102.50 discount and net proceeds of $97,897.50. The journal entries include crediting Notes Payable for $99,000 when the note is issued and debiting Notes Payable plus Interest Expense, while crediting Cash for the net proceeds upon payment at maturity.

Step-by-step explanation:

Journalizing the Issuance and Maturity of a Discounted Note

To journalize the issuance of a 45-day note for $99,000 at a 7% discount rate on March 1st, you need to calculate the discount amount and the net proceeds of the note. To do this, use the formula: Discount = Principal x Discount Rate x (Time/360). For the issuance:

Discount = $99,000 x 7% x (45/360) = $1,102.50

Net Proceeds = Principal - Discount = $99,000 - $1,102.50 = $97,897.50

The journal entry on March 1 would be:

To record the payment of the note at maturity:

It's important to note that the discount on a note is recorded as Interest Expense, which represents the cost of borrowing for the period of the note.

Answer 2

The Journal entries are as follows:

(i) Account payable A/c Dr. $99,000

To notes payable $99,000

(To record issue note payable)

(ii) Notes payable A/c Dr. $99,000

Interest Expense A/c Dr. $866

To cash A/c $99,866

(To record payment of note at maturity)

Working Notes:

Interest Expense = $99,000 × 7% × (45 ÷ 360)

= $99,000 × 7% × 0.125

= $866