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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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.
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
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Expert Solution
Step 1
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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