On october 1, eder fabrication borrowed $60 million and issued a nine-month promissory note. interest was payable at maturity. interest was discounted at issuance at a 12% discount rate. prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at december 31, the end of the reporting period.

cash        55,110,929 debit

   note payable      55,110,929 credit

--to record singing of promissory note with discounted interest--

interest expense 1.583.741,77 debit

   note payable              1.583.741,77 credit

--to record accrued interest on note payable --

Explanation:

the note plus interest will be for 60 millions.

So to calcualte the isuance ofthe note we must calculate the present value of a lump sum at 12% discount rate:

Maturity  60,000,000.00

time   0.75

rate  0.12

PV   55,110,929.18

then at December 31th we solve for the accrued interest:

Principal55,110,929.18

time0.25 (3 months over 12 month a year)

rate0.12000

Amount56,694,670.95

accrued interest: 56,694,670.95 - 55,110,929.18 = 1.583.741,77

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