On October 1, Eder Fabrication borrowed $60 million and issued a nine-month promissory note. Interest was payable at maturity. Interest was discounted at issuance at a 12% discount rate. Prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at December 31, the end of the reporting period.

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TomShelby TomShelby · Answer 1 · 2019-10-02T05:50:33+02:00

Answer:

cash 55,110,929 debit

note payable 55,110,929 credit

--to record singing of promissory note with discounted interest--

interest expense 1.583.741,77 debit

note payable 1.583.741,77 credit

--to record accrued interest on note payable --

Explanation:

the note plus interest will be for 60 millions.

So to calcualte the isuance ofthe note we must calculate the present value of a lump sum at 12% discount rate:

[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]

Maturity 60,000,000.00

time 0.75

rate 0.12

[tex]\frac{60000000}{(1 + 0.12)^{0.75} } = PV[/tex]

PV 55,110,929.18

then at December 31th we solve for the accrued interest:

[tex]Principal \: (1+ r)^{time} = Amount[/tex]

Principal 55,110,929.18

time 0.25 (3 months over 12 month a year)

rate 0.12000

[tex]55110929.18154 \: (1+ 0.12)^{0.25} = Amount[/tex]

Amount 56,694,670.95

accrued interest: 56,694,670.95 - 55,110,929.18 = 1.583.741,77