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

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