Question

On September 1, 2017 Storm Company received a $15,000, 3-year, 4%-note from Buck Company fro services provided. On that date, Storm recorded $14,591.51 in services revenue. Buck Company has agreed that interest on the note will be paid at maturity. Storm’s fiscal year ends on December 31. The market rate for notes of similar risk on the date of issue was 5%. Storm uses the effective interest method fro amortizing any discounts or premiums on notes.

Prepare the journal entry that Storm Company will record on December 31, 2017.

Answer 1

Solution:

Discount on note received = $15,000 - $14,591.51 = $408.49

Interest revenue accrued on 31.12.2017 = $14,591.51 * 5%*4/12 = $243.19

Actual interest payable on 31.12.2017 = $15,000 * 4%*4/12 = $200

Discount to be amortizedo n 31.12.2017 = $243.19 - $200 = $43.19

Journal Entries - Storm Company
Date	Particulars	Debit	Credit
31-Dec-17	Interest recivables Dr	$200.00
	Discount on note receivables	$43.19
	To Interest revenue		$243.19
	(To record interest revenue and amortization of discount)