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
Requirement a:
To calculate:
Discount rate used by the lender

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:
Now, the discount rate used by the lender can be calculated using the formula given below:
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.
Thus, rate of discount used by the lender was 12%.
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:
Requirement b:
To calculate:
Effective interest rate on the loan

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:
Now, the effective interest rate can be calculated using the formula given below:
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.
Thus, effective rate of interest on the loan is 12.63%.
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
- 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 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
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:
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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Chapter 7 Solutions
Accounting: What the Numbers Mean
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