Question

McCormick Corporation issued a 4-year, \(40,000, 5% note to Greenbush Company on January 1, 2017, and received a computer that normally sells for \)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.

Short answer

The total for both the debit and credit sides is $43,779.40.

Step-by-step solution

Meaning of Discount on Notes Payable

The difference between the face value and the amount received for notes is a discount if the face value is higher than the received amount. It is amortized over the maturity period of notes payable.

Journal Entry

Journal Entries
Date	Accounts and Explanation	Debit	Credit
January 1, 2017	Computer	$31,495
	Discount on Notes Payable	$8,505
	Notes Payable		$40,000
December 31, 2017	Interest Expenses	$3,779.40
	Discount on Notes Payable		$1,779.40
	Cash		$2,000.00

Working:

Discount on notes payable on January 1= ($40,000-$31,495) = $8,505

Interest expenses on December 31 = ($31,495 x 12%) = $3,779.40

Interest paid in cash paid on December 31= ($40,000 x 5%) = $2,000.

Discount on notes payable on December 31 ($3,779.40-$2,000) = $1,779.40.