Brestovacki
Corporation issued a $50,000, four-year, 5% note to Jernigan Corp. on January
1, 2011, and received a computer that normally sells for $38,912. The note
requires annual interest payments each December 31. The market interest rate
for a note of similar risk is 11%. Prepare Brestovacki’s journal entry for
(a)
The January 1, 2011 issuance and
(b)
The December 31, 2011 interest payment using the effective interest method.
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(a)
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Computer...................................................................................
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38,912
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Notes Payable...............................................................
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38,912
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(b)
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Interest
Expense.......................................................................
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4,280*
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Cash...............................................................................
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2,500**
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Notes Payable...............................................................
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1,780
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*($38,912 X 11% = $4,280)
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**($50,000 X 5% = $2,500)
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The transaction is a monetary transaction and as such
should be measured by estimating the value of the note by discounting it at the
market interest rate of 11%.
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Excel
formula: =PV(rate,nper,pmt,fv,type)
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Using a
financial calculator:
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PV
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?
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Yields
$ 38,912
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I
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11%
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N
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4
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PMT
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$(2,500)
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FV
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$
(50,000)
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Type
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0
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