Question

On January 1, 2020 Malone borrowed $150,000 in exchange for a 4 year zero interest note. The normal borrowing rate for Malone is 8%.

Record the necessary journal entries at 1/1/20, 12/31/20 and 12/31/21

Answer 1

Date	Account title and explanation	Debit	Credit
1/1/20	Cash	$110,255
	Discount on notes payable	$39,746
	Notes payable		$150,000
	[To record notes payable]
12/31/20	Interest expense	$8,820
	Discount on bonds payable		$8,820
	[To record interest expense]
12/31/20	Interest expense	$9,526
	Discount on bonds payable		$9,526
	[To record interest expense]

Calculations:

Cash received on notes = $150,000 x 0.73503 PV of $1 (8%, 4 yrs) = $110,255

Interest amortization schedule (partial)
Year	Interest expense	Carrying value
1/1/20		$110,255
12/31/20	$8,820.40	$119,075.40
12/31/21	$9,526.03	$128,601.43

Interest expense = Preceding carrying value x 8%