Question

On August 31, Jenks Co. partially refunded $450,000 of its outstanding 10% note payable made one year ago to Arma State Bank by paying $450,000 plus $45,000 interest, having obtained the $495,000 by using $131,000 cash and signing a new one-year $400,000 note discounted at 9% by the bank.

Instructions

(1) Make the entry to record the partial refunding. Assume Jenks Co. makes reversing entries when appropriate.

(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.

Answer 1

Answer:
Preparation of journal entries.
	Accounts Titles and Explanation	Debit (in $)	Credit (in $)
1.	Notes Payable	$450,000
	Interest Expense	$45,000
	Discount on Notes Payable (9% × $400,000)	$36,000
	Notes Payable		$400,000
	Cash		$131,000
	(To record the partial refunding)
2.	Interest Expense	$12,000
	Discount on Notes Payable               ( $36,000 x 4/12 months)		$12,000
	(To record the amortization of discount)