Answer:
The journal entries are as follows:
(a) Jan 1, 2020
Computer A/c Dr. $24,224
Discount on Note payable A/c Dr. $7,776
To Note payable $32,000
(To record issue of note at discount)
(b) Dec 31, 2020
Interest Expense $2,906.88
To Cash $1,280
To Amortization of Note discount $1,626.88
(To record interest on note payable)
Working note:
Discount on note issued:
= Issue price - Selling price of computer received
= ($32,000 - $24,224)
= $7,776
Face value of note = $32,000, Book value of note = $24,224
Interest payment, Dec 31:
= Face value x Coupon rate
= $32,000 x 4%
= $1,280
Interest expense, Dec 31:
= Book value x Market rate
= $24,224 x 12%
= $2,906.88
