Exercise 9-17A Comparing Effective Interest Rates on Discount versus Interest-Bearing Notes

Accounting for Current Liabilities and Payroll

Exercise 9-17A Comparing Effective Interest Rates on Discount versus Interest-Bearing Notes (Appendix)

Sheldon Jones borrowed money by issuing two notes on March 1, Year 1. The financing transactions are described next:

1. Borrowed funds by issuing a $52,000 face value discount note to Farmers Bank. The note had an 8 percent discount rate, a one-year term to maturity, and was paid off on March 1, Year 2.
2. Borrowed funds by issuing a $52,000 face value, interest-bearing note to Valley Bank. The note had an 8 percent stated rate of interest, a one-year term to maturity, and was paid off on March 1, Year 2.

Required:

a. Show the effects of issuing the two notes on the financial statements using separate horizontal financial statement models like those shown next. Record the transaction amounts under the appropriate categories. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Record only the events occurring on the date of issue. Do not record accrued interest or the repayment at maturity.
b. What is the total amount of interest to be paid on each note?
c. What amount of cash was received from each note when it was issued?
d. Which note has the higher effective interest rate? Support your answer with appropriate computations.

Exercise 9-18A Recording Accounting Events for a Discount Note (Appendix)

Harden Co. issued a $60,000 face value discount note to National Bank on July 1, Year 1. The note had a 6 percent discount rate and a one-year term to maturity.

Required:

Prepare general journal entries for the following:

a. The issuance of the note on July 1, Year 1.
b. The adjustment for accrued interest at the end of the year, December 31, Year 1.
c. Recording interest expense for Year 2 and repaying the principal on June 30, Year 2.