Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate. Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date. Requirement a: To calculate: Discount rate used by the lender

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Answer 1

Question

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

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Answer 2

Question

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

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Answer 3

Question

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

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Answer 4

Question

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

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Answer 5

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Answer 6

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

Answer 7

Chapter 7, Problem 7.6E

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement a:

To calculate:

Discount rate used by the lender

Answer 8

Expert Solution

Answer to Problem 7.6E

Discount rate used by the lender= 12%

Answer 9

Expert Solution

Answer 10

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

To calculate the discount rate used by the lender, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the discount rate used by the lender can be calculated using the formula given below:

Discount rate= Discount amount/ Face value* Period

We have already calculated discount amount as $24,000, face value is given as $4, 80,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, Discount rate= $24,000/$4,80,000*5/12= 12%

Thus, rate of discount used by the lender was 12%.

Answer 13

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

Answer 14

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

The effective interest rate (APR) gives the actual and effective interest being paid on the loan by the borrower. The annualized effective interest rate can be calculated using the following formula:

Effective interest rate= Discount amount/ Net proceeds*Period

Requirement b:

To calculate:

Effective interest rate on the loan

Answer 15

Expert Solution

Answer to Problem 7.6E

Effective interest rate on the loan= 12.63%

Answer 16

Expert Solution

Answer 17

Expert Solution

Answer 18

Expert Solution

Answer 19

Explanation of Solution

To calculate the effective interest rate on the loan, firstly we will calculate the amount of discount. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000
Note proceeds= $4, 56,000

Discount amount can be calculated using the following equation:

Amount of discount= Interest paid= Face value− Proceeds from note= $4,80,000− $4,56,000= $24,000

Now, the effective interest rate can be calculated using the formula given below:

Effective interest rate= Discount amount/ Net proceeds*Period

We have already calculated discount amount as $24,000, net proceeds are given as $4, 56,000 and time period from August 1 to December 31, 2016 accounts for 5 months.

Therefore, effective interest rate= $24,000/ $4,56,000*5/12= 12.63%

Thus, effective rate of interest on the loan is 12.63%.

Answer 20

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Answer 21

To determine

Concept Introduction:

Notes payable Note payable is a promissory note by which a borrower borrows money and promised to pay it back with interest before predetermined period. The interest may be fixed over the life of note or vary depending on the prime rate.

Note payable is shown in balance sheet as a short- term liability if it is due within next 12 months or as long- term liability if it is due at a later date.

Requirement c:

Write journal entry showing effects of following entries:

Signing the note and receipt of cash proceeds on August 1, 2016
Recording interest expense for the month of September
Repaying the note on December 31, 2016

Answer 22

Expert Solution

Answer to Problem 7.6E

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

December 31, 2016	Notes payable		4,80,000
	Cash			4,80,000
	(To record repayment of note)

Answer 23

Expert Solution

Answer 24

Expert Solution

Answer 25

Expert Solution

Answer 26

Explanation of Solution

Journal entry for signing note and receipt of cash proceeds on August 1, 2016

When cash proceeds are received, there is increase in cash account. Cash is an asset; therefore, it will get debited. Also, notes payable is a liability. There has been an increase in notes payable, thus, notes payable will get credited. Further, there is discount on notes payable which will also be debited. Following information is given in the problem:

Maturity value or face value as on December 31, 2016= $4, 80,000

Note proceeds= $4, 56,000

We have already calculated discount amount as $24,000. Thus, following would be the journal entry to be passed in the books of Colombo Co.:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
August 1, 2016	Cash		4,56,000
	Discount on note payable		24,000
	Notes payable			4,80,000
	(To record proceeds from note payable and discount on note)

For recording journal entry for interest expense for the month of September

When interest expense is incurred, it will get debited since interest is an expense. Discount on notes payable is also increased. Since it is a liability, it will also be credited.

The face value is given as $4, 80,000 in the problem. Rate of interest has already been calculated as 12%. Further, interest expense for the month of September is to be calculated, therefore time period is 1 month.

Now, the amount of interest expense is calculated using the following formula:

Interest expense= Face value* Rate on interest* Time period = $4,80,000* 12%*1/12= $4,800

Thus, following would be the journal entry to be passed in the books of Colombo Co. for interest expense:

Journal in the books of Colombo Co. (Amount in $)

Date	Particulars	L.F.	Debit amount	Credit amount
September 30, 2016	Interest expense		4,800
	Discount on note payable			4,800
	(To record interest expense and discount amortization for September month)

(b) Repaying the note on December 31, 2016

When the note is repaid, there is decrease in cash account. Cash is an asset; therefore, it will get credited. Notes payable is a liability. There has been a decrease in notes payable, thus, notes payable will get debited. Maturity value as on December 31, 2016 is given in the problem as $4, 80,000.

Thus, following would be the journal entry to be passed in the books of Colombo Co. for repayment of note:

Journal in the books of Colombo Co. (Amount in $)