Kerala Company borrowed $10,000 on a two-year, zero coupon note. The note was is
ID: 2578302 • Letter: K
Question
Kerala Company borrowed $10,000 on a two-year, zero coupon note. The note was issued on December 31, 2018. The face amount of the note, $12,544, is to be paid at maturity on December 31, 2020. This company uses the straight line method of amortization.
Required:
1. Allocate the interest of $2,544 to the two one-year interest periods, using straight-line interest amortization.
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2. Prepare the entries to recognize the borrowing, the first year's interest expense, and the second year's interest expense plus redemption of the note at maturity. For compound entries, for those boxes in which no entry is required, leave the box blank.
2018, Dec. 31 Cash Discount on Notes Payable Notes Payable (Record issuance of note at discount) 2019, Dec. 31 Interest Expense Discount on Notes Payable (Record interest expense) 2020, Dec. 31 Interest Expense Notes Payable Discount on Notes Payable Cash (Record interest expense and repayment of note principal)Explanation / Answer
Answer 1 Allocation of interest using straight line interest amortization Interest allocated to Year 2019 = $2544 / 2 = $1272 Interest allocated to Year 2020 = $2544 / 2 = $1272 Answer 2 Journal entries Date Account Titles Debit Credit 2018,Dec.31 Cash $10,000 Discount on Notes Payable $2,544 Notes Payable $12,544 (recording of issuance of note at discount) 2019,Dec.31 Interest Expense $1,272 Discount on Notes Payable $1,272 (recording of interest expense) 2020,Dec.31 Interest Expense $1,272 Notes Payable $12,544 Discount on Notes Payable $1,272 Cash $12,544 (Recording interest expense and repayment of note principal)
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