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Intermediate Accounting: Reporting...

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

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

effective interest rate

interest expense for 2019

Prepare 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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