Question

McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1, 2013, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick's journal entries for (a) the January 1 issuance and (b) the December 31 interest

Answer 1

Answer:

computer          31,495 debit

discount on NP 9,505 debit

     note payable         40,000 credit

interest expense 3,779.4 debit

discount on NP    1,779.4  credit

cash              2,000    credit

Explanation:

proceed          31,495

face value 40,000

discount on note payable -8,505

the note has a nominal value of 40,000 but it was sign to purchase a computer worth 31,495 therefore there is a discount

we will adjust the note like the effective-rate:

31,495 x 12%  3,779.4

cash procced: 40,000 x 5% = 2,000

amorization will be the difference: 1,779.4