Question

On December 31, 2017 Hutter Company received a $5,000, 4-year, 5%-note Mutter Company for services provided. The present value of the note is $4,661.28. The implicit rate of the note is 7%. Mutter Company has agreed that interest on the note will be paid annually on December 31. Hutter uses the effective interest method for amortizing any discounts or premiums on notes.

Prepare the journal entry that Hutter Company will record on December 31, 2018

Answer 1

Solution:

Interest to be received on 31.12.2018 = $5,000 * 5% = $250

Interest revenue to be recognized on 31/12/2018 using effective interest method = $4,661.28*7% = $326.29

Discount to be amortized = $326.29 - $250 = $76.29

Journal Entries - Hutter Company
Date	Particulars	Debit	Credit
31-Dec-18	Cash Dr	$250.00
	Discount on note receivables	$76.29
	To Interest revenue		$326.29
	(To record interest revenue and amortization of discount)