On January 1, 2014, Botosan Company issued a $1,239,000, 5-year, zero-interest-b
ID: 2425540 • Letter: O
Question
On January 1, 2014, Botosan Company issued a $1,239,000, 5-year, zero-interest-bearing note to National Organization Bank. The note was issued to yield 10% annual interest. Unfortunately, during 2015 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2015, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $826,000 of the principal at maturity. Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.
Explanation / Answer
Answer:(a)
The entries for the issuance of the note on January 1, 2014:
The present value of the note is: $1,239,000 X .62092 = $769320
Botosan Company (Debtor) :
Cash. .................................................................. $769320
Discount on Notes Payable. ............................ 469689
To Note Payable. .............................................. 1,239,000
National Organization Bank (Creditor) :
Notes Receivable. ............................................ 1,239,000
To Discount on Notes Receivable. ................. 469680
To Cash. ............................................................ $769320
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