Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd
Cengagenowv2, 1 Term Printed Access Card For Wahlen/jones/pagach’s Intermediate Accounting: Reporting And Analysis, 2017 Update, 2nd
2nd Edition
ISBN: 9781337912259
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
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Chapter 9, Problem 2P

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 2016

1.

Expert Solution
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Explanation of Solution

  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.

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

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

c. Compute the interest expense for an interest bearing note at 12% for 2016.

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 2016 is $1,200.

(b) Non-interest- bearing note discounted at 12%.

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.

b. Compute the effective interest rate for non-interest bearing note discounted at 12%:

Effective interest rate = Total interest paidAmount of cash borrowed×100%=(Face value of noteAmount of cash received)$19,400×100%=($60,000$52,800)$52,800×100%=13.64%(Rounded off)

Thus, the effective interest rate on non-bearing interest note is 13.64%.

c. Compute the interest expense for 2016 for non-interest bearing note discounted at 12%:

Interestexpense=Total discount on notes payable×[2months expiredout of 1 year]12months in a year=$7,200×212=$1,200

Thus, the amount of interest expense for 2016 is $1,200.

2.

To determine

Prepare the journal entries for Incorporation E under each case for 2016 and 2017.

2.

Expert Solution
Check Mark

Explanation of Solution

Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.

Prepare journal entries for Incorporation E assuming interest bearing note at 12%.

  1. a) To record the cash received:
DateAccount titles and explanationDebit ($)Credit($)
November 1, 2016Cash60,000 
     Notes Payable 60,000
 (To record the amount borrowed on note)  

Table (1)

  1. b) To record the adjusting entry for interest expense on December 31, 2016:
DateAccount titles and explanationDebit ($)Credit($)
December 31, 2016Interest expenses1,200 
     Interest payable 1,200
 (To record the amount of accrued interest during the year ended December 31, 2016)  

Table (2)

  1. c) To record the payment of interest at maturity date:
DateAccount titles and explanationDebit ($)Credit($)
October 31, 2017Interest expenses (1)6,000 
 Interest payable1,200 
     Cash 7,200
 (To record the amount of interest paid at maturity)  

Table (3)

Working note (1):

Calculate the amount of interest expense:

Interest expense=Face value of note×Discount rate×[Number of month from January to October]12months in a year=$60,000 ×12×1012=$6,000

  1. d) To record the payment of note at maturity:
DateAccount titles and explanationDebit ($)Credit($)
October 31, 2017Notes payable60,000 
         Cash 60,000
 (To record the payment of note at maturity)  

Table (4)

Prepare journal entries for Incorporation E assuming non-interest bearing note discounted at 12%.

  1. a) To record the cash received:
DateAccount titles and explanationDebit ($)Credit($)
November 1, 2016Cash52,800 
 Discount on notes payable7,200 
     Notes Payable 60,000
 (To record the amount borrowed at a discount rate of 12%)  

Table (5)

  1. b) To record the adjusting entry for interest expense on December 31, 2016.
DateAccount titles and explanationDebit ($)Credit($)
December 31, 2016Interest expenses1,200 
 Discount on notes payable 1,200
 (To record the amount of accrued interest during the year ended December 31, 2016)  

Table (6)

  1. c) To record the interest expense incurred from January 1 to October 31.
DateAccount titles and explanationDebit ($)Credit($)
October 31, 2016Interest expenses (2)6,000 
 Discount on notes payable 6,000
 (To record the amount of interest expenses on note incurred from January 1 to October 31)  

Table (7)

Working note (2):

Calculate the amount of interest expense:

Interestexpense=[Face value of note×Discount rate×10months (from January 1 to October 31)12months in a year]=$60,000 ×12×1012=$6,000

  1. d) To record the payment of note at maturity:
DateAccount titles and explanationDebit ($)Credit($)
October 31, 2017Notes payable60,000 
         Cash 60,000
 (To record the payment of note at maturity)  

Table (8)

3.

To determine

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

3.

Expert Solution
Check Mark

Explanation of Solution

Effective interest rate: The fixed interest rate which is applied on the carrying value of note, to amortize the note discount is referred to as effective interest rate.

Reasons for the higher effective rate for the non-interest bearing note:

In the above situation, Incorporation E pays the same of amount of interest of $7,200. However, Incorporation E receives $60,000 under interest bearing note, $52,800 under non-interest bearing note. As, it receives less amount of cash for the non-interest bearing note, the effective rate of interest of the non-interest bearing note is higher than the effective rate of interest of an interest bearing note.

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Chapter 9 Solutions

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