On January 2, 2009Dennisson Inc. purchased a piece of machinery and signed a noninterest bearing note in its payment. The Note requires the Company to pay $100,000 on December 31,2011. Dennisson is not sure what interest rate appropriately reflects the time value of money. However, the price lists indicate the machine could have been purchased for a price of $79,383. Required: a. Show how Dennisson should record his transaction in its General Journal on January 2, 2009 recognizing the Discount on Notes Payable. b. What is the effective interest rate implicit in the transaction/ Show computation.
On January 2, 2009Dennisson Inc. purchased a piece of machinery and signed a noninterest bearing note in its payment. The Note requires the Company to pay $100,000 on December 31,2011. Dennisson is not sure what interest rate appropriately reflects the time value of money. However, the price lists indicate the machine could have been purchased for a price of $79,383. Required: a. Show how Dennisson should record his transaction in its General Journal on January 2, 2009 recognizing the Discount on Notes Payable. b. What is the effective interest rate implicit in the transaction/ Show computation.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
- On January 2, 2009Dennisson Inc. purchased a piece of machinery and signed a noninterest bearing note in its payment. The Note requires the Company to pay $100,000 on December 31,2011. Dennisson is not sure what interest rate appropriately reflects the time value of money. However, the price lists indicate the machine could have been purchased for a price of $79,383.
Required:
a. Show how Dennisson should record his transaction in its General Journal on January 2, 2009 recognizing the Discount on Notes Payable.
b. What is the effective interest rate implicit in the transaction/ Show computation.
Expert Solution
Step 1
Discount on Notes Payable is the difference between the price of the machine and the face amount of notes payable.
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