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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Exercise Note Interest Payment and Interest Expense (Effective Interest)

Jones Manufacturing sold $900,000 of 15-year, 7% notes for $822,186. The notes were sold January 1, 2020, and pay interest semiannually on June 30 and December 31. The effective interest rate was 8%. Assume Jones uses the effective interest rate method.

Required:

  1. Prepare the entry to record the sale of the notes.
  2. Determine the amount of the semiannual interest payments for the notes.
  3. Prepare the amortization table through 2021. (Note: Round to the nearest dollar.)
  4. Prepare the entry for Jones’ journal at June 30, 2020, to record the payment of 6 months’ interest and the related interest expense.
  5. Determine interest expense for 2021.

To determine

(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:

Journal entry for the issuance of Notes.

Explanation

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)...

To determine

(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.

To determine

(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.

To determine

(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.

To determine

(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.

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