Question

Lyric Company issued a 90-day zero-interest-bearing note with a face amount of $3,000. The present value of the note is $2,855. The journal entry to record the issuance of the note will include

Answer 1

Answer:

Cash.........................Dr       $2,855

Discount on notes payable   $145

            Notes payable                          $3,000

(Notes issued at discount)

Explanation:

Zero interest note, as the name suggests are issued with no interest charged on amount due. As such, notes are issued at a price that is lesser than face value. Difference between face value and present value of note represent discount on notes payable.

Journal entry to record issue of notes payable:

Particulars                            Debit                    Credit

Cash                                      $2,855

Discount on notes payable    $145

              Notes payable                                      $3,000

(Notes issued at discount)

Cash is debited with present value of note of $2,855 as notes are issued less than face value.