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    Shirleyan's Avatar
    Shirleyan Posts: 13, Reputation: 1
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    #1

    Apr 9, 2007, 12:25 AM
    Promissory Note
    Hi all,

    If a company on 12/31/05 discounts a promissory note of $30,000 at a bank. The note was created on 06/30/05 with a term of one year, and an interest rate of 8%. The bank's discount rate is 12%.

    How can I record this entry?

    I'm sort of confused with what rate to use here, thank you very much!
    goldenbutterfly's Avatar
    goldenbutterfly Posts: 63, Reputation: 8
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    #2

    Apr 9, 2007, 07:12 PM
    I think this is how it is computed. It's been a while since I answered a similar problem.

    dr. cash 32,400 (balancing figure)
    dr. Interest expense (30000*12%*6/12) 1800
    Cr Accrued Interest income (30000*8%) 2400
    Cr. Noted receivable 30000

    * dr of Interest expense and cr of accrued interest income can be combined as one cr account.
    *Accrued Interest income will then be adjusted at the end of the year.

    Tell me if the answer is correct:)
    Shirleyan's Avatar
    Shirleyan Posts: 13, Reputation: 1
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    #3

    Apr 9, 2007, 09:00 PM
    Thank you very much I will ask my professor tomorrow and get back to you!
    Shirleyan's Avatar
    Shirleyan Posts: 13, Reputation: 1
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    #4

    Apr 9, 2007, 09:03 PM
    By the way, I'm still a bit confused by how does this entry balance?
    For example using Assets=Liabilities+Shareholder's Equity.
    Could you please show me in more detail how do the entries balance please?

    Thank you very much!
    goldenbutterfly's Avatar
    goldenbutterfly Posts: 63, Reputation: 8
    Junior Member
    		  
    #5

    Apr 9, 2007, 10:45 PM
    I'm sorry, my journal entry earlier does not balance. The debit to cash should have been 30600.

    dr. cash 30,600 (balancing figure)
    dr. Interest expense (30000*12%*6/12) 1800
    cr Accrued Interest income (30000*8%) 2400
    cr. Noted receivable 30000

    Total changes on the Asset side:
    Increase in Cash 30,600
    Decrease in Notes Receivable 30000
    Net Increase in Assets 600

    Total changes on the Stockholder's Equity (Retained Earnings)
    Increase in Interest Income 2400
    Increase in Interest Expense 1800
    Net Increase in Stockholders 600

    So both sides of the Accounting Equation gets an increase in 600.
    goldenbutterfly's Avatar
    goldenbutterfly Posts: 63, Reputation: 8
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    #6

    Apr 9, 2007, 10:51 PM
    Btw, I just want to add that the interest expense pertains to remaining period that the note is outstanding that is why I multiplied it by 6/12. If the note is discounted, say, 4 months before maturity, interest expense will be 4months/12months.

    Study hard and do not rely heavily on ASK ME.:) Enjoy Accounting!
    Shirleyan's Avatar
    Shirleyan Posts: 13, Reputation: 1
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    #7

    Apr 9, 2007, 10:54 PM
    Thank you soooooooo much for your time and help! :))))
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