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Chapter 14: Q11BE (page 754)

Samson Corporation issued a 4-year, \(75,000, zero-interest-bearing note to Brown Company on January 1, 2017, and received cash of \)47,664. The implicit interest rate is 12%. Prepare Samson’s journal entries for (a) the January 1 issuance and (b) the December 31 recognition of interest.

Short Answer

Expert verified

The total for both the debit and credit sides is $80,719.68.

Step by step solution

01

Meaning of Zero-Interest Note

Notes that are issued at free of interest rate is zero-interest rate. It is issued at discounted value than the face value of the notes and payable at face value on maturity.

02

Journal Entry

Journal Entries


Date

Accounts and Explanation

Debit

Credit

January 1, 2017

Cash

$47,664

Discount on Notes Payable

$27,336

Notes Payable

$75,000

December 31, 2017

Interest Expenses

$5,719.68

Discount on Notes Payable

$5,719.68






Working:

Discount on notes payable on January 1= ($75,000-$47,664) = $27,336

Interest expenses on December 31 = ($47,664 x 12%) = $5,719.68

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Most popular questions from this chapter

In each of the following independent cases, the company closes its books on December 31.

1. Sanford Co. sells \(500,000 of 10% bonds on March 1, 2017. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2020. The bonds yield 12%. Give entries through December 31, 2018.

2. Titania Co. sells \)400,000 of 12% bonds on June 1, 2017. The bonds pay interest on December 1 and June 1. The due date of the bonds is June 1, 2021. The bonds yield 10%. On October 1, 2018, Titania buys back \(120,000 worth of bonds for \)126,000 (includes accrued interest). Give entries through December 1, 2019.

Instructions

For the two cases prepare all of the relevant journal entries from the time of sale until the date indicated. Use the effective-interest method for discount and premium amortization (construct amortization tables where applicable). Amortize premium or discount on interest dates and at year-end. (Assume that no reversing entries were made.)

Differentiate between a fixed-rate mortgage and a variable-rate mortgage.

What are the two methods of amortizing discount and premium on bonds payable? Explain each.

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

  1. expensed in the period when the debt is issued.
  2. recorded as a reduction in the carrying value of bonds payable.
  3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

Coldwell, Inc. issued a \(100,000. 4-years, 10% note at face value to Flint Hills Bank on January 1, 2017, and received \)100,000 cash. The note requires annual interest payments each December 31. Prepare Coldwell’s journal entries to record (a) the issuance of the note and (b) the December 31 interest payment.
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