Question

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson used a "Discount of Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2020 will include a_____________.

Answer 1

Answer:

Debit to Interest Expense for $5,200

Explanation:

To calculate the adjusting entry for December 31,2020, the following steps will be taken

Step 1: Determine the amount of Discount to be amortized equally over 3 Months

The Bearing note was purchased for $500,000

The face value of the note was $507,800

The discount = $507,800 - $500,000 = $7,800

Step 2: Determine the amount to be included for entry December 31, 2020

Since, it was signed as a three-month interest bearing note, then by December 31st, two months would have gone by; November 1-30th and December 1-31st.

Hence, the adjusting entry will be made for 2 months, November and December as follows:

2/3 (2 out of the 2 months)/ $7,800 (Discount amount)

= 2/3 x $7,800

=$5,200

The adjusting entry will be as follows by December 31st

Debit Interest expenses by $52,00

Credit Discount on notes payable by $5,200