
1.
Compute the following items assuming (a) an interest-bearing note at 12%, (b) non-interest- bearing note discounted at 12%.
- a) Cash received
- b) Effective interest rate
- c) Interest expense for 2016
1.

Explanation of Solution
- (a) An interest bearing note at 12%
a. Compute the cash received for interest-bearing note at 12%:
The cash received for interest-bearing note at 12% is $60,000. As the note includes an interest-bearing at 12% thus the face value of the note will be given by the creditor to the Incorporation E.
b. Compute the effective interest rate for interest bearing note at 12%:
The effective interest rate for interest bearing note is 12%.
c. Compute the interest expense for an interest bearing note at 12% for 2016.
Thus, the interest expense for 2016 is $1,200.
(b) Non-interest- bearing note discounted at 12%.
a. Compute the cash received for non-interest bearing note discounted at 12%:
Note: For the non-interest bearing note the creditor will not give the face value of the note. Instead, the creditor will deduct the interest rate 12% from the face value of the note and the balance amount will be given to Incorporation E.
Thus, the cash received by Incorporation E is $52,800.
b. Compute the effective interest rate for non-interest bearing note discounted at 12%:
Thus, the effective interest rate on non-bearing interest note is
c. Compute the interest expense for 2016 for non-interest bearing note discounted at 12%:
Thus, the amount of interest expense for 2016 is $1,200.
2.
Prepare the
2.

Explanation of Solution
Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.
Prepare journal entries for Incorporation E assuming interest bearing note at 12%.
- a) To record the cash received:
Date | Account titles and explanation | Debit ($) | Credit($) |
November 1, 2016 | Cash | 60,000 | |
Notes Payable | 60,000 | ||
(To record the amount borrowed on note) |
Table (1)
- b) To record the
adjusting entry for interest expense on December 31, 2016:
Date | Account titles and explanation | Debit ($) | Credit($) |
December 31, 2016 | Interest expenses | 1,200 | |
Interest payable | 1,200 | ||
(To record the amount of accrued interest during the year ended December 31, 2016) |
Table (2)
- c) To record the payment of interest at maturity date:
Date | Account titles and explanation | Debit ($) | Credit($) |
October 31, 2017 | Interest expenses (1) | 6,000 | |
Interest payable | 1,200 | ||
Cash | 7,200 | ||
(To record the amount of interest paid at maturity) |
Table (3)
Working note (1):
Calculate the amount of interest expense:
- d) To record the payment of note at maturity:
Date | Account titles and explanation | Debit ($) | Credit($) |
October 31, 2017 | Notes payable | 60,000 | |
Cash | 60,000 | ||
(To record the payment of note at maturity) |
Table (4)
Prepare journal entries for Incorporation E assuming non-interest bearing note discounted at 12%.
- a) To record the cash received:
Date | Account titles and explanation | Debit ($) | Credit($) |
November 1, 2016 | Cash | 52,800 | |
Discount on notes payable | 7,200 | ||
Notes Payable | 60,000 | ||
(To record the amount borrowed at a discount rate of 12%) |
Table (5)
- b) To record the adjusting entry for interest expense on December 31, 2016.
Date | Account titles and explanation | Debit ($) | Credit($) |
December 31, 2016 | Interest expenses | 1,200 | |
Discount on notes payable | 1,200 | ||
(To record the amount of accrued interest during the year ended December 31, 2016) |
Table (6)
- c) To record the interest expense incurred from January 1 to October 31.
Date | Account titles and explanation | Debit ($) | Credit($) |
October 31, 2016 | Interest expenses (2) | 6,000 | |
Discount on notes payable | 6,000 | ||
(To record the amount of interest expenses on note incurred from January 1 to October 31) |
Table (7)
Working note (2):
Calculate the amount of interest expense:
- d) To record the payment of note at maturity:
Date | Account titles and explanation | Debit ($) | Credit($) |
October 31, 2017 | Notes payable | 60,000 | |
Cash | 60,000 | ||
(To record the payment of note at maturity) |
Table (8)
3.
Explain the reason for the higher effective rate for the non-interest bearing note.
3.

Explanation of Solution
Effective interest rate: The fixed interest rate which is applied on the carrying value of note, to amortize the note discount is referred to as effective interest rate.
Reasons for the higher effective rate for the non-interest bearing note:
In the above situation, Incorporation E pays the same of amount of interest of $7,200. However, Incorporation E receives $60,000 under interest bearing note, $52,800 under non-interest bearing note. As, it receives less amount of cash for the non-interest bearing note, the effective rate of interest of the non-interest bearing note is higher than the effective rate of interest of an interest bearing note.
Want to see more full solutions like this?
Chapter 9 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
- What are fixed assets projected to be given this information for this accounting question?arrow_forwardSolve this accounting problemarrow_forwardA machine costing $77,500 with a 5-year life and $4,700 residual value was purchased January 2. Compute depreciation for each of the 5 years, using the double-declining-balance method. Year1 Y2 Y3 Y4 Y5arrow_forward
- Solare Company acquired mineral rights for $536,800,000. The diamond deposit is estimated at 48,800,000 tons. During the current year, 3,390,000 tons were mined and sold. Required: 1.Determine the depletion rate. 2. Determine the amount of depletion expense for the current year. 3.Journalize the adjusting entry to recognize the depletion expense. Refer to the Chart of Accounts for exact wording of account titles. _____________ Debit / Credit _____________ Debit / Crditarrow_forwardExercise 1-24 (Algo) Linking the statement of owner's equity and balance sheet LO P2 Mahomes Company reported the following data at the end of its first year of operations on December 31. Cash Accounts receivable Equipment Land Accounts payable Owner investments Mahomes, Withdrawals Net income $ 15,500 16,500 18,500 62,500 12,500 62,500 31,500 69,500 (a) Prepare its year-end statement of owner's equity. Hint. Mahomes, Capital on January 1 was $0. (b) Prepare its year-end balance sheet, using owner's capital calculated in part a. Complete this question by entering your answers in the tabs below. Required A Required B Prepare its year-end statement of owner's equity. Hint: Mahomes, Capital on January 1 was $0. Cash MAHOMES COMPANY Statement of Owner's Equity For Year Ended December 31arrow_forwardht = ences X On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash withdrawals by owner Consulting revenue Salaries expense Cash $ 8,450 Accounts receivable 16,950 Office supplies 4,080 Rent expense Land 46,020 Office equipment 18,860 Telephone expense Accounts payable 9,280 Owner investments 84,920 Miscellaneous expenses $ 2,930 16,950 4,420 7,900 860 680 Exercise 1-18 (Algo) Preparing an income statement LO P2 Using the above information prepare a December income statement for the business. ERNST CONSULTING Income Statement Revenues Rent expense Salaries expense Telephone expense Total revenues $ 4,420 7,900 860 $ SA Assets Cash 8,450 Accounts receivable 16,950 Office supplies 4,080 Land 46,020 Office equipment 18,860 navable 9,280 13,180 5 11 of 14 Next >arrow_forward
- Equipment was acquired at the beginning of the year at a cost of $77,220. The equipment was depreciated using the straight-line method based upon an estimated useful life of 6 years and an estimated residual value of $7,560. P1 What was the depreciation expense for the first year? _______ P2 Assuming the equipment was sold at the end of the second year for $58,320, determine the gain or loss on sale of the equipment. $_______________ P3 Journalize the entry to record the sale. Refer to the Chart of Accounts for exact wording of account titles. 1. ____ Debit / Credit 2.____ Debit / Credit 3.____ Debit / Credit 4.____ Debit / Creditarrow_forwardUse the following information for the Exercises below. (Algo) [The following information applies to the questions displayed below.] On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash Accounts receivable Office supplies Land Office equipment Accounts payable Owner investments $ 8,450 Cash withdrawals by owner 16,950 4,080 Rent expense Consulting revenue Salaries expense 18,860 Telephone expense Miscellaneous expenses 46,020 9,280 84,920 $ 2,930 16,950 4,420 7,900 860 680 Check my work Exercise 1-21 (Algo) Preparing a statement of cash flows LO P2 Also assume the following: a. The owner's initial investment consists of $38,900 cash and $46,020 in land. b. The company's $18,860 equipment purchase is paid in cash. c. Cash paid to employees is $2,700. The accounts payable balance of $9,280 consists of the $4,080 office supplies…arrow_forwardht = ences X On December 1, Jasmin Ernst organized Ernst Consulting. On December 3, the owner contributed $84,920 in assets to launch the business. On December 31, the company's records show the following items and amounts. Cash withdrawals by owner Consulting revenue Salaries expense Cash $ 8,450 Accounts receivable 16,950 Office supplies 4,080 Rent expense Land 46,020 Office equipment 18,860 Telephone expense Accounts payable 9,280 Owner investments 84,920 Miscellaneous expenses $ 2,930 16,950 4,420 7,900 860 680 Exercise 1-18 (Algo) Preparing an income statement LO P2 Using the above information prepare a December income statement for the business. ERNST CONSULTING Income Statement Revenues Rent expense Salaries expense Telephone expense Total revenues $ 4,420 7,900 860 $ SA Assets Cash 8,450 Accounts receivable 16,950 Office supplies 4,080 Land 46,020 Office equipment 18,860 navable 9,280 13,180 5 11 of 14 Next >arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax CollegeFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning


