Chapter 9, Problem 2P

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Chapter
Section

### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
65 views

# Notes Payable and Effective Interest On November 1,2019, Edwin Inc. borrowed cash and signed a $60,000, 1-year note payable.Required:Compute the following items assuming (a) an interest-bearing note at 12%, (b) a non-interest-bearing note discounted at 12%:cash receivedeffective interest rateinterest expense for 2019Prepare the journal entries for Edwin under each case for 2019 and 2020.Next Level Why is the effective rate higher for the non-interest-bearing note? 1. To determine Compute the following items assuming (a) an interest-bearing note at 12%, (b) non-interest- bearing note discounted at 12%. 1. a) Cash received 2. b) Effective interest rate 3. c) Interest expense for 2019 Explanation 1. (a) An interest bearing note at 12% (a) Compute the cash received for interest-bearing note at 12%: The cash received for interest-bearing note at 12% is$60,000. As the note includes an interest-bearing at 12% thus the face value of the note will be given by the creditor to the Incorporation E.

1. (b)  Compute the effective interest rate for interest bearing note at 12%:

The effective interest rate for interest bearing note is 12%.

1. (c)   Compute the interest expense for an interest bearing note at 12% for 2019.

Interestexpense=Face value of note×Discount rate×[2months expiredout of 1 year]12months in a year=$60,000 ×12×212=$1,200

Thus, the interest expense for 2019 is $1,200. (b) non-interest- bearing note discounted at 12%. 1. (a) Compute the cash received for non-interest bearing note discounted at 12%: Cash received by Incorporation E = Face value of note × 88%=$60,000×0.88=$52,800 Note: For the non-interest bearing note the creditor will not give the face value of the note. Instead, the creditor will deduct the interest rate 12% from the face value of the note and the balance amount will be given to Incorporation E. Thus, the cash received by Incorporation E is$52,800

2.

To determine

Prepare the journal entries for Incorporation E under each case for 2019 and 2020.

3.

To determine

Explain the reason for the higher effective rate for the non-interest bearing note.

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