(a)
Introduction:
As per the effective interest rate method, a constant interest rate on book or carrying value is assigned to each period.
To record:
Answer to Problem 79E
Journal Entry for issuance of Notes at discount
Date | Particulars | Debit ($) | Credit ($) |
1st January 2020 | Cash Dr. Discount on Notes Payable Dr. Notes Payable |
822,186 77,814 |
900,000 |
Explanation of Solution
Given:
$900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.
The face value of Notes issued is recorded as Notes payable and any premium or discount on issue of Notes is recorded in separate “Premium on Notes Payable” or “Discount on Notes Payable” account whereas in case of issuance of Notes at par it is a regular journal entry where cash (asset) increased along with Notes Payable (long term liability).
Journal Entry for issuance of Notes at discount
Date | Particulars | Debit ($) | Credit ($) |
1st January 2020 | Cash Dr. Discount on Notes Payable Dr. Notes Payable |
822,186 77,814 |
900,000 |
(b)
Introduction:
A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.
To calculate:
The interest payments on notes.
Answer to Problem 79E
The interest payments on the notes is $31,500.
Explanation of Solution
Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.
The interest payment is calculated on the yield rate (i.e. effective rate of interest) whereas the interest expense is calculated on the stated rate of interest. Whereas, Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.
So, Interest payment can be calculated as:
Interest Payment =
Interest Payment =
Interest Payment = $31,500.
(c)
Introduction:
A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.
To prepare:
The amortization table.
Answer to Problem 79E
Amortization table
Annual Period | Cash Payment (Credit) | Interest Expense (Debit) | Discount on Notes Payable (Credit) | Discount on Notes Payable Balance | Carrying Value |
At issue | 77,814 | 822,186 | |||
6/30/2020 | 31,500 | 32,887 | 1,387 | 76,427 | 823,573 |
12/31/2020 | 31,500 | 32,943 | 1,443 | 74,984 | 825,016 |
6/30/2021 | 31,500 | 33,001 | 1,501 | 73,483 | 826,517 |
12/31/2021 | 31,500 | 33,061 | 1,561 | 71,922 | 828,078 |
6/30/2022 | 31,500 | 33,123 | 1,623 | 70,299 | 829,701 |
12/31/2022 | 31,500 | 33,188 | 1,688 | 68,611 | 831,389 |
6/30/2023 | 31,500 | 33,256 | 1,756 | 66,856 | 833,144 |
12/31/2023 | 31,500 | 33,326 | 1,826 | 65,030 | 834,970 |
6/30/2024 | 31,500 | 33,399 | 1,899 | 63,131 | 836,869 |
12/31/2024 | 31,500 | 33,475 | 1,975 | 61,156 | 838,844 |
6/30/2025 | 31,500 | 33,554 | 2,054 | 59,102 | 840,898 |
12/31/2025 | 31,500 | 33,636 | 2,136 | 56,967 | 843,033 |
6/30/2026 | 31,500 | 33,721 | 2,221 | 54,745 | 845,255 |
12/31/2026 | 31,500 | 33,810 | 2,310 | 52,435 | 847,565 |
6/30/2027 | 31,500 | 33,903 | 2,403 | 50,032 | 849,968 |
12/31/2027 | 31,500 | 33,999 | 2,499 | 47,534 | 852,466 |
6/30/2028 | 31,500 | 34,099 | 2,599 | 44,935 | 855,065 |
12/31/2028 | 31,500 | 34,203 | 2,703 | 42,233 | 857,767 |
6/30/2029 | 31,500 | 34,311 | 2,811 | 39,422 | 860,578 |
12/31/2029 | 31,500 | 34,423 | 2,923 | 36,499 | 863,501 |
6/30/2030 | 31,500 | 34,540 | 3,040 | 33,459 | 866,541 |
12/31/2030 | 31,500 | 34,662 | 3,162 | 30,297 | 869,703 |
6/30/2031 | 31,500 | 34,788 | 3,288 | 27,009 | 872,991 |
12/31/2031 | 31,500 | 34,920 | 3,420 | 23,589 | 876,411 |
6/30/2032 | 31,500 | 35,056 | 3,556 | 20,033 | 879,967 |
12/31/2032 | 31,500 | 35,199 | 3,699 | 16,334 | 883,666 |
6/30/2033 | 31,500 | 35,347 | 3,847 | 12,487 | 887,513 |
12/31/2033 | 31,500 | 35,501 | 4,001 | 8,487 | 891,513 |
6/30/2034 | 31,500 | 35,661 | 4160.52 | 4326.46 | 895,674 |
12/31/2034 | 31,500 | 35,827 | 4326.94 | -0.49 | 900,000 |
Explanation of Solution
Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.
Amortization table
Annual Period | Cash Payment (Credit) | Interest Expense (Debit) | Discount on Notes Payable (Credit) | Discount on Notes Payable Balance | Carrying Value |
At issue | 77,814 | 822,186 | |||
6/30/2020 | 31,500 | 32,887 | 1,387 | 76,427 | 823,573 |
12/31/2020 | 31,500 | 32,943 | 1,443 | 74,984 | 825,016 |
6/30/2021 | 31,500 | 33,001 | 1,501 | 73,483 | 826,517 |
12/31/2021 | 31,500 | 33,061 | 1,561 | 71,922 | 828,078 |
6/30/2022 | 31,500 | 33,123 | 1,623 | 70,299 | 829,701 |
12/31/2022 | 31,500 | 33,188 | 1,688 | 68,611 | 831,389 |
6/30/2023 | 31,500 | 33,256 | 1,756 | 66,856 | 833,144 |
12/31/2023 | 31,500 | 33,326 | 1,826 | 65,030 | 834,970 |
6/30/2024 | 31,500 | 33,399 | 1,899 | 63,131 | 836,869 |
12/31/2024 | 31,500 | 33,475 | 1,975 | 61,156 | 838,844 |
6/30/2025 | 31,500 | 33,554 | 2,054 | 59,102 | 840,898 |
12/31/2025 | 31,500 | 33,636 | 2,136 | 56,967 | 843,033 |
6/30/2026 | 31,500 | 33,721 | 2,221 | 54,745 | 845,255 |
12/31/2026 | 31,500 | 33,810 | 2,310 | 52,435 | 847,565 |
6/30/2027 | 31,500 | 33,903 | 2,403 | 50,032 | 849,968 |
12/31/2027 | 31,500 | 33,999 | 2,499 | 47,534 | 852,466 |
6/30/2028 | 31,500 | 34,099 | 2,599 | 44,935 | 855,065 |
12/31/2028 | 31,500 | 34,203 | 2,703 | 42,233 | 857,767 |
6/30/2029 | 31,500 | 34,311 | 2,811 | 39,422 | 860,578 |
12/31/2029 | 31,500 | 34,423 | 2,923 | 36,499 | 863,501 |
6/30/2030 | 31,500 | 34,540 | 3,040 | 33,459 | 866,541 |
12/31/2030 | 31,500 | 34,662 | 3,162 | 30,297 | 869,703 |
6/30/2031 | 31,500 | 34,788 | 3,288 | 27,009 | 872,991 |
12/31/2031 | 31,500 | 34,920 | 3,420 | 23,589 | 876,411 |
6/30/2032 | 31,500 | 35,056 | 3,556 | 20,033 | 879,967 |
12/31/2032 | 31,500 | 35,199 | 3,699 | 16,334 | 883,666 |
6/30/2033 | 31,500 | 35,347 | 3,847 | 12,487 | 887,513 |
12/31/2033 | 31,500 | 35,500 | 4,000 | 8,487 | 891,513 |
6/30/2034 | 31,500 | 35,661 | 4160 | 4327 | 895,674 |
12/31/2034 | 31,500 | 35,827 | 4327 | 0 | 900,000 |
Cash Payment =
Cash Payment =
Cash Payment = $31,500
Interest Expense =
Interest Expense =
Discount on Notes Payable = Interest Expense - Cash payment
Discount on Notes Payable Balance = Previous Year balance − Current year Discount
Carrying Value = Previous Carrying Value + Change in Discount Balance.
(d)
Introduction:
A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.
To record:
Journal entry to show interest expense and payment of interest on 30th June 2020.
Answer to Problem 79E
Journal Entry (combined) to show interest expense and payment of interest until 30th June 2020.
Date | Particulars | Debit ($) | Credit ($) |
30th June 2020 | Interest Expense Dr. Cash Discount on Notes Payable |
32,887 | 31,500 1,387 |
Explanation of Solution
Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.
Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.
Journal Entry to show interest expense until 30th June 2020
Date | Particulars | Debit ($) | Credit ($) |
30th June 2020 | Interest Expense Dr. Interest Payable Discount on Notes Payable |
32,887 | 31,500 1,387 |
Journal Entry to interest payment until 30th June 2020
Date | Particulars | Debit ($) | Credit ($) |
30th June 2020 | Interest Payable Dr. Cash |
31,500 | 31,500 |
(e)
Introduction:
A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.
To calculate:
Interest Expense (annual) for year 2021.
Answer to Problem 79E
The annual interest expense for year 2021 is $66,062.
Explanation of Solution
Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.
Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.
Interest Expense (06/30/2021) =
Premium on Notes Payable = $33,001 - $31,500 = $1,501
Carrying Value = $825,016+ $1,501 = $826,517
Interest Expense (12/31/2021) =
Premium on Notes Payable = $31,500 - $33,061 = $1,561
Carrying Value = $826517+ $1,561 = $828078
Total interest expense for year 2021 = Interest Expense (06/30/2021) + Interest Expense (12/31/2021)
Total interest expense for year 2021 = $33,001 + $33,061
Total interest expense for year 2021 = $66,062.
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Chapter 9 Solutions
Cornerstones of Financial Accounting
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