Question

On November 16, 2019, Clear Glass Company borrowed $22,000 from First American Bank by issuing a 90-day, non-interest-bearing note. The bank discounted this note at 10% and remitted the difference to Clear Glass. Required: 1. Prepare the journal entries of Clear Glass to record the preceding information, the related calendar year-end adjusting entry, and payment of the note at maturity. 2. Show how the preceding items would be reported on the December 31, 2019, balance sheet. 3. Next Level What is Clear Glass Company’s effective interest rate?

Answer 1

Question 1

Date	Particulars	Dr Amount ($)	Cr Amount ($)
Nov. 16, 2019	Cash A/c Dr	21,450
	Discount in note payable A/c Dr	550
	To Notes Payable A/c		22,000
	(To record borrowing of for a peroid of 90 days at an interest of 10%)

Date	Particulars	Dr Amount ($)	Cr Amount ($)
Dec. 31, 2019	Interest expense A/c Dr	275
	To Discount in note payable A/c		275
	(To record the discount allowed on note payable)

Date	Particulars	Dr Amount ($)	Cr Amount ($)
Feb. 15, 2017	Note Payable A/c Dr	22,000
	To Cash A/c		22,000
Feb. 15, 2017	Interest expense A/c Dr	275
	To Discount in note payable A/c		275

Question 2

BALANCE SHEET
Current Liabilities:
Notes Payable	$22,000
Discount on note payable	$275	$21,725

Question 3

Effective Interest Rate = (550/21450)* (360/90) *100

= 0.0256*4*100

= 10.24%