CHAPTER9 Homework Problem- Saved to this PC out References Mailings Review View
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CHAPTER9 Homework Problem- Saved to this PC out References Mailings Review View Help Tell me whst you want to do Paragraph Styles CHAPTER 9 Homework Problem Name On July 1, 2016, Morgan Company needs exactly $206,400 in cash to pay an existing obligation. Morgan has decided to borrow from North Bank, which charges 14% interest on loans. The loan will be due in one year. Morgan is not sure whether to ask the bank for (a) an interest-bearing loan with interest and principal payable at the end of the year or (b) a non-interest-bearing loan due in one year but with interest deducted in advance. What will be the face value of the note assuming that interest is paid when the loan is due? Interest is deducted in advance? Calculate the effective interest rate on the note assuming that: interest is pald when the loan is due: Interest is deducted in advance: Assume that Morgan negotiates and signs the one-year note with the bank on July 1, 2016. Also, assume that Morgan's accounting year ends December 31. Prepare all of the journal entries necessary to record the issuance of the note and the interest on the note assuming that Interest is paid when the loan is dueExplanation / Answer
Part 1
Face Value of Notes Payable
If Interest is paid when the loan is due
$ 206,400.00
If Interest is deducted in advance
(206400-14%)
$ 177,504.00
Part 2
Effective rate of Interest
If Interest is paid when the loan is due
(28896/206400*100)
14.00%
If Interest is deducted in advance
(28896/177504*100)
16.28%
Part 3
Journal entries
If Interest is paid when the loan is due
.1 july 2016
Cash
$ 206,400.00
Notes Payable
$ 206,400.00
(Notes Payable Issued)
.31 dec 2016
Interest Expense
$ 14,448.00
Interest Payable
$ 14,448.00
(Interest for half year )
.1 july 2017
Interest Expense
$ 14,448.00
Interest Payable
$ 14,448.00
Notes Payable
$ 206,400.00
Cash
$ 235,296.00
(Notes payable repaid after 1 Year)
If Interest is deducted in advance
.1 july 2016
Cash
$ 181,549.44
Discount on Note Payable
$ 24,850.56
Notes Payable
$ 206,400.00
(Notes Payable Issued)
.31 dec 2016
Discount on Note Payable
$ 14,448.00
Interest Payable
$ 14,448.00
(Interest for half year )
.1 july 2017
Discount on Note Payable
$ 14,448.00
Interest Payable
$ 14,448.00
(Interest for half year ended july 2017)
.1 july 2017
Notes Payable
$ 206,400.00
Cash
$ 206,400.00
(Notes payable repaid after 1 Year)
Part 4
Balance sheet
July 1 2016
Assuming Interest is paid when loan is due.
Current Liabilities
Notes Payable
$ 206,400.00
Balance sheet
July 1 2016
Assuming Interest is deducted in advance
Current Liabilities
Notes Payable
$ 206,400.00
Less: Discount on Note Payable
$ 24,850.56
Net Value of Note Payable
$ 181,549.44
Part 1
Face Value of Notes Payable
If Interest is paid when the loan is due
$ 206,400.00
If Interest is deducted in advance
(206400-14%)
$ 177,504.00