Question

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3...

On January 1, 2017, Trinity Company loaned $901,560 to Litton Industries in exchange for a 3 year, zero-interest-bearing note with a face amount, $1,200,000. The prevailing rate of interest for a loan of this type is 10%. The adjusting journal entry made by Litton at December 31, 2017 with regard to the note will include

a debit to Interest Expense for $120,000.
a debit to Interest Expense for $29,850.
a credit to Discount on Notes Payable for $90,156.
a credit to Interest Payable for $60,000.
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Homework Answers

Answer #1

The correct answer is

A) Credit to discount on note payable for $ 90156

Calculation

Firstly we have to calculate the amount of interest expense and discount amortization

= carrying value * interest rate

= 901560*10%

= $ 90156

The correct journal entry to be passed

Particular Debit Credit

Interest expense $ 90156

Discount on note payable $ 90156

From the above journal entry we can conclude that correct answer is

A) Credit to discount on note payable for $ 90156

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