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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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Non-Interest-Bearing Notes Payable On November 16, 2019, Clear Glass Company borrowed $20,000 from First American Bank by issuing a 90-day, non-interest-bearing note. The bank discounted this note at 12% and remitted the difference to Clear Glass.

Required:

  1. 1. Prepare the journal entries of Clear Glass to record the preceding information, the related calendar year-end adjusting entry, and payment of the note at maturity.
  2. 2. Show how the preceding items Would be reported on the December 31, 2019, balance sheet.
  3. 3. Next Level What is Clear Glass Company’s effective interest rate?

1.

To determine

Prepare journal entry to record the given transaction and also prepare the entry that is related to the related calendar year –end adjusting entry, and payment of the notes at maturity.

Explanation

Notes payable:

Notes Payable is a written promise to pay a certain amount on a future date, with the certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

DateAccount Titles and explanationDebit ($)Credit ($)
November  16, 2019Cash 19,4000 
 Discount  in notes payable ($20,000×12%×90360) 600 
      Notes payable 20,000
 (To record borrowing of money for a period of 90 day at an interest of 12%)  

Table (1)

  • Cash is an asset and there is an increase in the value of an asset. Hence debit the cash by $19,400.
  • Discount on notes payable is a contra liability and there is an increase in the value of liability. Hence, debit the discount on notes payable by $600.
  • Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $20,000.
DateAccount Titles and explanationDebit ($)Credit ($)
December 31, 2019Interest expense ($600×12) 300 
      Discount  in notes payable  300
 (To record the discount allowed on notes payable )  

Table (2)

  • Interest expense is a component of stockholder’s equity and there is an increase in the value of expense

2.

To determine

Show the manner by which the given items in the transaction will be reported in the balance sheet.

3.

To determine

Calculate the Company C’s effective interest rate.

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