Question

On January 1, Blue Spruce Corp. lent $53,000 to Larkspur, Inc., accepting Larkspur’s $70,543, three-year, zero-interest-bearing note. The implied interest is 10%.

Prepare Blue’s journal entries for the initial transaction, recognition of interest each year assuming the use of the effective interest method, and the collection of $70,543 at maturity.

Account Titles and Explanation	Debit	Credit
enter an account title to record initial transaction	enter a debit amount	enter a credit amount
enter an account title to record initial transaction	enter a debit amount	enter a credit amount
(To record initial transaction)
enter an account title to record interest income in the first year	enter a debit amount	enter a credit amount
enter an account title to record interest income in the first year	enter a debit amount	enter a credit amount
(To record interest income in the first year)
enter an account title to record interest income in the second year	enter a debit amount	enter a credit amount
enter an account title to record interest income in the second year	enter a debit amount	enter a credit amount
(To record interest income in the second year)
enter an account title to record interest income in the third year	enter a debit amount	enter a credit amount
enter an account title to record interest income in the third year	enter a debit amount	enter a credit amount
(To record interest income in the third year)
enter an account title to record collection at maturity	enter a debit amount	enter a credit amount
enter an account title to record collection at maturity	enter a debit amount	enter a credit amount
(To record collection at maturity)

Answer 1

Account Titles and Explanation	Debit	Credit
Notes Receivable	53000
Cash		53000
(To record initial transaction)
Notes Receivable	5300		=53000*10%
Interest revenue		5300
(To record interest income in the first year)
Notes Receivable	5830		=(53000+5300)*10%
Interest revenue		5830
(To record interest income in the second year)
Notes Receivable	6413		=(53000+5300+5830)*10%
Interest revenue		6413
(To record interest income in the third year)
Cash	70543
Notes Receivable		70543
(To record collection at maturity)