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10 September, 20:41

McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1, 2013, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%. Prepare McCormick's journal entries for (a) the January 1 issuance and (b) the December 31 interest

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  1. 10 September, 21:00
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    computer 31,495 debit

    discount on NP 9,505 debit

    note payable 40,000 credit

    interest expense 3,779.4 debit

    discount on NP 1,779.4 credit

    cash 2,000 credit

    Explanation:

    proceed 31,495

    face value 40,000

    discount on note payable - 8,505

    the note has a nominal value of 40,000 but it was sign to purchase a computer worth 31,495 therefore there is a discount

    we will adjust the note like the effective-rate:

    31,495 x 12% 3,779.4

    cash procced: 40,000 x 5% = 2,000

    amorization will be the difference: 1,779.4
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Home » Business » McCormick Corporation issued a 4-year, $40,000, 5% note to Greenbush Company on January 1, 2013, and received a computer that normally sells for $31,495. The note requires annual interest payments each December 31.
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