Chapter 9, Problem 94PSB

To determine

(a)

Introduction:

When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.

To record:

Journal entry for money borrowed.

Answer to Problem 94PSB

Journal Entry for issuance of Notes at discount

Date	Particulars	Debit ($)	Credit ($)
1st January 2020	Cash Dr. Discount on Notes Payable Dr. Notes Payable	985,500 14,500	1,000,000

Explanation of Solution

Given:

Issued note of $1,000,000 for 10years 8.75% note on 1^st January 2020 for $985,500 (interest paid semi-annually on June 30 and December 31).

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	985,500 14,500	1,000,000

To determine

(b)

Introduction:

When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.

To record:

Adjusting Journal entry on 30^th June 2020.

Answer to Problem 94PSB

Adjusting Journal Entry on 30^th June 2020

Date	Particulars	Debit ($)	Credit ($)
30th June 2020	Interest Expense Dr. Cash Discount on Notes Payable	44,475	43,750 725

Explanation of Solution

Given:

Issued note of $1,000,000 for 10years 8.75% note on 1^st January 2020 for $985,500 (interest paid semi-annually on June 30 and December 31).

The borrower is entitled to pay interest periodically, unless stated otherwise.

As per the question, the principal and interest are payable semi-annually on 30^th June and 31^st December.

Adjusting Journal Entry on 30^th June 2020

Date	Particulars	Debit ($)	Credit ($)
30th June 2020	Interest Expense Dr. Cash Discount on Notes Payable	44,475	43,750 725

Interest Payment (semi-annual) = $\text{Face value × Stated rate × }\frac{\text{6}}{\text{12}}$

Interest Payment (semi-annual) = $\text{\$1,000,000 × 8}\text{.75\% × }\frac{\text{6}}{\text{12}}$

Interest Payment (semi-annual) = $43,750

Discount Amortization = $\frac{\$14,500}{20}$

Discount Amortization = $725

Interest Expense = Interest Payment (semi-annual) + Discount Amortization

Interest Expense = $43,750+ $725

Interest Expense = $44,475.

To determine

(c)

Introduction:

When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.

To record:

Adjusting Journal entry on 31^st December 2020.

Answer to Problem 94PSB

Adjusting Journal Entry on 31^st December 2020

Date	Particulars	Debit ($)	Credit ($)
31st December 2020	Interest Expense Dr. Cash Discount on Notes Payable	44,475	43,750 725

Explanation of Solution

Given:

Issued note of $1,000,000 for 10years 8.75% note on 1^st January 2020 for $985,500 (interest paid semi-annually on June 30 and December 31).

The borrower is entitled to pay interest periodically, unless stated otherwise.

As per the question, the principal and interest are payable semi-annually on 30^th June and 31^st December.

Adjusting Journal Entry on 31^stDecember 2020

Date	Particulars	Debit ($)	Credit ($)
31stDecember 2020	Interest Expense Dr. Cash Discount on Notes Payable	44,475	43,750 725

Interest Payment (semi-annual) = $\text{Face value × Stated rate × }\frac{\text{6}}{\text{12}}$

Interest Payment (semi-annual) = $\text{\$1,000,000 × 8}\text{.75\% × }\frac{\text{6}}{\text{12}}$

Interest Payment (semi-annual) = $43,750

Discount Amortization = $\frac{\$14,500}{20}$

Discount Amortization = $725

Interest Expense = Interest Payment (semi-annual) + Discount Amortization

Interest Expense = $43,750 + $725

Interest Expense = $44,475.

To determine

(d)

Introduction:

When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.

To evaluate:

Carrying amount of these Notes on 31^st December 2024.

Answer to Problem 94PSB

Liability in Balance Sheet for year ending on 31^st December 2020

Liability	Sub-total ($)	Total ($)
Discount on Notes payable (until 31st December 2023) (+) Discount on Notes payable for year 2024 Total Discount on Notes payable	5,800 1,450	7,250
Notes Payable Total Long term Liability	985,500	985,500
Total Liability	-	992,750

Explanation of Solution

Given:

Issued note of $1,000,000 for 10years 8.75% note on 1^st January 2020 for $985,500 (interest paid semi-annually on June 30 and December 31).

The borrower is entitled to pay interest periodically, unless stated otherwise.

As per the question, the principal and interest are payable semi-annually on 30^th June and 31^st December.

Discount Amortization = $725

Discount on Amortization for 10 periods (i.e. 5 years) = $\$725\times 10$

Discount on Amortization for 10 periods (i.e. 5 years) = $7,250

This will increase “Discount on Notes payable” in the balance sheet.

So, Discount on Notes payable (until 31^st December 2023) = $\$725\times 8$

Discount on Notes payable (until 31^st December 2023) = $5,800

Besides, the money borrowed against note is repayable on maturity. Hence, Notes Payable value will remain unchanged.

Liability	Sub-total ($)	Total ($)
Discount on Notes payable (until 31st December 2023) (+) Discount on Notes payable for year 2024 Total Discount on Notes payable	5,800 1,450	7,250
Notes Payable Total Long term Liability	985,500	985,500
Total Liability	-	992,750