Chapter 9, Problem 79E

To determine

(a)

Introduction:

As per the effective interest rate method, a constant interest rate on book or carrying value is assigned to each period.

To record:

Journal entry for the issuance of Notes.

Answer to Problem 79E

Journal Entry for issuance of Notes at discount

Date	Particulars	Debit ($)	Credit ($)
1st January 2020	Cash Dr. Discount on Notes Payable Dr. Notes Payable	822,186 77,814	900,000

Explanation of Solution

Given:

$900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.

The face value of Notes issued is recorded as Notes payable and any premium or discount on issue of Notes is recorded in separate “Premium on Notes Payable” or “Discount on Notes Payable” account whereas in case of issuance of Notes at par it is a regular journal entry where cash (asset) increased along with Notes Payable (long term liability).

Journal Entry for issuance of Notes at discount

Date	Particulars	Debit ($)	Credit ($)
1st January 2020	Cash Dr. Discount on Notes Payable Dr. Notes Payable	822,186 77,814	900,000

To determine

(b)

Introduction:

A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

The interest payments on notes.

Answer to Problem 79E

The interest payments on the notes is $31,500.

Explanation of Solution

Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.

The interest payment is calculated on the yield rate (i.e. effective rate of interest) whereas the interest expense is calculated on the stated rate of interest. Whereas, Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.

So, Interest payment can be calculated as:

Interest Payment = $\text{Face Value × Stated Rate }\times \frac{6}{12}$

Interest Payment = $\text{\$900,000 × 7\% }\times \frac{6}{12}$

Interest Payment = $31,500.

To determine

(c)

Introduction:

A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To prepare:

The amortization table.

Answer to Problem 79E

Amortization table

Annual Period	Cash Payment (Credit)	Interest Expense (Debit)	Discount on Notes Payable (Credit)	Discount on Notes Payable Balance	Carrying Value
At issue				77,814	822,186
6/30/2020	31,500	32,887	1,387	76,427	823,573
12/31/2020	31,500	32,943	1,443	74,984	825,016
6/30/2021	31,500	33,001	1,501	73,483	826,517
12/31/2021	31,500	33,061	1,561	71,922	828,078
6/30/2022	31,500	33,123	1,623	70,299	829,701
12/31/2022	31,500	33,188	1,688	68,611	831,389
6/30/2023	31,500	33,256	1,756	66,856	833,144
12/31/2023	31,500	33,326	1,826	65,030	834,970
6/30/2024	31,500	33,399	1,899	63,131	836,869
12/31/2024	31,500	33,475	1,975	61,156	838,844
6/30/2025	31,500	33,554	2,054	59,102	840,898
12/31/2025	31,500	33,636	2,136	56,967	843,033
6/30/2026	31,500	33,721	2,221	54,745	845,255
12/31/2026	31,500	33,810	2,310	52,435	847,565
6/30/2027	31,500	33,903	2,403	50,032	849,968
12/31/2027	31,500	33,999	2,499	47,534	852,466
6/30/2028	31,500	34,099	2,599	44,935	855,065
12/31/2028	31,500	34,203	2,703	42,233	857,767
6/30/2029	31,500	34,311	2,811	39,422	860,578
12/31/2029	31,500	34,423	2,923	36,499	863,501
6/30/2030	31,500	34,540	3,040	33,459	866,541
12/31/2030	31,500	34,662	3,162	30,297	869,703
6/30/2031	31,500	34,788	3,288	27,009	872,991
12/31/2031	31,500	34,920	3,420	23,589	876,411
6/30/2032	31,500	35,056	3,556	20,033	879,967
12/31/2032	31,500	35,199	3,699	16,334	883,666
6/30/2033	31,500	35,347	3,847	12,487	887,513
12/31/2033	31,500	35,501	4,001	8,487	891,513
6/30/2034	31,500	35,661	4160.52	4326.46	895,674
12/31/2034	31,500	35,827	4326.94	-0.49	900,000

Explanation of Solution

Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.

Amortization table

Annual Period	Cash Payment (Credit)	Interest Expense (Debit)	Discount on Notes Payable (Credit)	Discount on Notes Payable Balance	Carrying Value
At issue				77,814	822,186
6/30/2020	31,500	32,887	1,387	76,427	823,573
12/31/2020	31,500	32,943	1,443	74,984	825,016
6/30/2021	31,500	33,001	1,501	73,483	826,517
12/31/2021	31,500	33,061	1,561	71,922	828,078
6/30/2022	31,500	33,123	1,623	70,299	829,701
12/31/2022	31,500	33,188	1,688	68,611	831,389
6/30/2023	31,500	33,256	1,756	66,856	833,144
12/31/2023	31,500	33,326	1,826	65,030	834,970
6/30/2024	31,500	33,399	1,899	63,131	836,869
12/31/2024	31,500	33,475	1,975	61,156	838,844
6/30/2025	31,500	33,554	2,054	59,102	840,898
12/31/2025	31,500	33,636	2,136	56,967	843,033
6/30/2026	31,500	33,721	2,221	54,745	845,255
12/31/2026	31,500	33,810	2,310	52,435	847,565
6/30/2027	31,500	33,903	2,403	50,032	849,968
12/31/2027	31,500	33,999	2,499	47,534	852,466
6/30/2028	31,500	34,099	2,599	44,935	855,065
12/31/2028	31,500	34,203	2,703	42,233	857,767
6/30/2029	31,500	34,311	2,811	39,422	860,578
12/31/2029	31,500	34,423	2,923	36,499	863,501
6/30/2030	31,500	34,540	3,040	33,459	866,541
12/31/2030	31,500	34,662	3,162	30,297	869,703
6/30/2031	31,500	34,788	3,288	27,009	872,991
12/31/2031	31,500	34,920	3,420	23,589	876,411
6/30/2032	31,500	35,056	3,556	20,033	879,967
12/31/2032	31,500	35,199	3,699	16,334	883,666
6/30/2033	31,500	35,347	3,847	12,487	887,513
12/31/2033	31,500	35,500	4,000	8,487	891,513
6/30/2034	31,500	35,661	4160	4327	895,674
12/31/2034	31,500	35,827	4327	0	900,000

Cash Payment = $\text{Face Value × Stated Rate }\times \frac{6}{12}$

Cash Payment = $\text{\$900,000 × 7\% }\times \frac{6}{12}$

Cash Payment = $31,500

Interest Expense = $\text{Carrying Value × Effective Rate }\times \frac{12}{12}$

Interest Expense = $\text{Carrying Value × 8\% }\times \frac{12}{12}$

Discount on Notes Payable = Interest Expense - Cash payment

Discount on Notes Payable Balance = Previous Year balance − Current year Discount

Carrying Value = Previous Carrying Value + Change in Discount Balance.

To determine

(d)

Introduction:

A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To record:

Journal entry to show interest expense and payment of interest on 30^th June 2020.

Answer to Problem 79E

Journal Entry (combined) to show interest expense and payment of interest until 30^th June 2020.

Date	Particulars	Debit ($)	Credit ($)
30th June 2020	Interest Expense Dr. Cash Discount on Notes Payable	32,887	31,500 1,387

Explanation of Solution

Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.

Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.

Journal Entry to show interest expense until 30^th June 2020

Date	Particulars	Debit ($)	Credit ($)
30th June 2020	Interest Expense Dr. Interest Payable Discount on Notes Payable	32,887	31,500 1,387

Journal Entry to interest payment until 30^th June 2020

Date	Particulars	Debit ($)	Credit ($)
30th June 2020	Interest Payable Dr. Cash	31,500	31,500

To determine

(e)

Introduction:

A Note is long term liability wherein the issuer is entitled to pay the face value of the Note at the time of maturity and make interest payments periodically. It is a breakdown of large debt to borrow as it may be too large for an individual lender.

To calculate:

Interest Expense (annual) for year 2021.

Answer to Problem 79E

The annual interest expense for year 2021 is $66,062.

Explanation of Solution

Given:$ 900,000, stated rate 7% and effective rate 8% were issued at $822,186 for 15 years.

Interest Expense of notes that were issued at premium is calculated by deducting the premium on notes payable (for the period) from Interest Payment.

Interest Expense (06/30/2021) = $\$825,016\text{ × 8\% × }\frac{6}{12}$ = $33,001

Premium on Notes Payable = $33,001 - $31,500 = $1,501

Carrying Value = $825,016+ $1,501 = $826,517

Interest Expense (12/31/2021) = $\text{\$}826,517\text{ × 8\% × }\frac{6}{12}$ = $33,061

Premium on Notes Payable = $31,500 - $33,061 = $1,561

Carrying Value = $826517+ $1,561 = $828078

Total interest expense for year 2021 = Interest Expense (06/30/2021) + Interest Expense (12/31/2021)

Total interest expense for year 2021 = $33,001 + $33,061

Total interest expense for year 2021 = $66,062.