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Recording a Note Payable Issued for Non-Cash Consideration Lathrop Inc. purchased equipment on January 1, 2020, for $75,000 cash plus a note payable. The fair value of the equipment on January 1, 2020, is $271,333. The market rate of interest is 6%. 5M Corp. uses the effective interest method to amortize discounts and premiums. Record the entries over the term of the note payable for the following three separate scenarios for the structuring of the note payable. a. The principal of $200,000 is due on December 31, 2021, and the note specified 5% interest payable each December 31 over a two-year period.

Recording a Note Payable Issued for Non-Cash Consideration Lathrop Inc. purchased equipment on January 1, 2020, for $75,000 cash plus a note payable. The fair value of the equipment on January 1, 2020, is $271,333. The market rate of interest is 6%. 5M Corp. uses the effective interest method to amortize discounts and premiums. Record the entries over the term of the note payable for the following three separate scenarios for the structuring of the note payable. a. The principal of $200,000 is due on December 31, 2021, and the note specified 5% interest payable each December 31 over a two-year period.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Recording a Note Payable Isued for Non-Cash Consideration Lathrop Inc. purchased equipment on January 1, 2020, for $75,000 cash plus a note payable. The fair value of the equipment on January 1, 2020, is $271,333. The market rate of interest is 6%. 5M Corp. uses the effective interest method to amortize discounts and premiums. Record the entries over the term of the note payable for the following three separate scenarios for the structuring of the note payable. a. The principal of $200,000 is due on December 31, 2021, and the note specified 5% interest payable each December 31 over a two-year period.
Transcribed Image Text:Recording a Note Payable Isued for Non-Cash Consideration Lathrop Inc. purchased equipment on January 1, 2020, for $75,000 cash plus a note payable. The fair value of the equipment on January 1, 2020, is $271,333. The market rate of interest is 6%. 5M Corp. uses the effective interest method to amortize discounts and premiums. Record the entries over the term of the note payable for the following three separate scenarios for the structuring of the note payable. a. The principal of $200,000 is due on December 31, 2021, and the note specified 5% interest payable each December 31 over a two-year period.
• Note: Round your answers to the nearest whole dollar. • Note: List multiple debits and credits (when applicable) in alphabetical order. Account Name Date Dr. Cr. Jan. 1, 2020 Discount on Note Payable 3,667 Equipment 271,333 Cash 75,000 Note Payable To record note issuance 200,000 Dec. 31, 2020 Interest Expense Cash 10,000 Discount on Note Payable To record interest expense Dec. 31, 2021 Interest Expense Cash 10,000 Discount on Note Payable To record interest expense Dec. 31, 2021 Note Payable 200,000 Cash 200,000 To record extinguishment of the note >> >
Transcribed Image Text:• Note: Round your answers to the nearest whole dollar. • Note: List multiple debits and credits (when applicable) in alphabetical order. Account Name Date Dr. Cr. Jan. 1, 2020 Discount on Note Payable 3,667 Equipment 271,333 Cash 75,000 Note Payable To record note issuance 200,000 Dec. 31, 2020 Interest Expense Cash 10,000 Discount on Note Payable To record interest expense Dec. 31, 2021 Interest Expense Cash 10,000 Discount on Note Payable To record interest expense Dec. 31, 2021 Note Payable 200,000 Cash 200,000 To record extinguishment of the note >> >
Expert Solution
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Effective interest method: It is a method to calculate the amount of discount/premium on the issue of bonds/notes to be written over the life of the bonds/notes before maturity. The difference between the actual interest rates payable and the rate of interest as per market represents the amount of discount/premium to be amortized each year.

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