Question

On January 1, a company issues a $150,000, 5%, five-year note. The market rate for the note is 8%. Which journal entry correctly records the issuance of this note?

Answer 1

Answer:

The Journal entry correctly records the issuance of this note is as follow:

Date   Account Titles                             Debit          Credit

          Cash                                       $132,032.33

          Discount on notes payable   $17,967.67

                  Notes payable                                     $150,000.00

                               Amount   PV factor at 8%     Present value

Annual interest         7500          3.99271               29945.33

Principal                  150000        0.68058             102087.00

Total                                                                         132032.33

Workings

- Annual interest = 150000*5% = 7500

- PV factor 8%

Annual interest = (1-(1.08)^-5)/0.08 = 3.99271

Principal = 1/1.08^5 = 0.68058