Mccormick corporation issued a 4-year, $40,000, 5% note to greenbush company on january 1, 2013, and received a computer that normally sells for $31,495. the note requires annual interest payments each december 31. the market rate of interest for a note of similar risk is 12%. prepare mccormick's journal entries for (a) the january 1 issuance and (b) the december 31 interest

computer          31,495 debit

discount on NP 9,505 debit

     note payable         40,000 credit

interest expense3,779.4debit

discount on NP    1,779.4  credit

cash              2,000    credit

Explanation:

proceed          31,495

face value40,000

discount on note payable-8,505

the note has a nominal value of 40,000 but it was sign to purchase a computer worth 31,495 therefore there is a discount

we will adjust the note like the effective-rate:

31,495 x 12%  3,779.4

cash procced: 40,000 x 5% = 2,000

amorization will be the difference: 1,779.4

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