Monty Corporation issued a 4-year, $32,000, 4% note to Greenbush Company on January 1, 2020, and received a computer that normally sells for $24,224. The note requires annual interest payments each December 31. The market rate of interest for a note of similar risk is 12%.

1. Prepare Monty's journal entries for (a) the January 1 issuance and (b) the December 31 interest

The journal entries are as follows:

(a) Jan 1, 2020

Computer A/c Dr. $24,224

Discount on Note payable A/c Dr. $7,776

To Note payable $32,000

(To record issue of note at discount)

(b) Dec 31, 2020

Interest Expense $2,906.88

To Cash $1,280

To Amortization of Note discount $1,626.88

(To record interest on note payable)

Working note:

Discount on note issued:

= Issue price - Selling price of computer received

= ($32,000 - $24,224)

= $7,776

Face value of note = $32,000, Book value of note = $24,224

Interest payment, Dec 31:

= Face value x Coupon rate

= $32,000 x 4%

= $1,280

Interest expense, Dec 31:

= Book value x Market rate

= $24,224 x 12%

= $2,906.88