Question

On January 2, 2016, Jennings Company purchases machinery and equipment and borrows $200,000 on a 5-year non-interest-bearing note. The principal of $200,000 will be paid at the maturity date of December 31, 2020. To place a fair value on the transaction, the accountant will impute an interest rate and use that rate to compute the present value of the note.Required: Assuming that an 8% interest rate is applicable, record the journal entry for interest expense for the year ended December 31, 2016.

Answer 1

Answer:

December 21, 2016

DR Interest expense....................................................$10,889.33

CR Discount on notes payable.......................................................$10,889.33

Explanation:

The interest to be paid will be charged on the present value of the note in 2016.

Present value of $200,000 = 200,000 / ( 1 + 8%)^5

= 200,000/1.4693280768‬

= $136,116.64

Interest to be paid;

= 136,116.64 * 8%

= $10,889.33