CHAPTER9 Homework Problem Saved to this PC out References Ma

CHAPTER9 Homework Problem- Saved to this PC out References Mailings Review View Help Tell me whst you want to do Paragraph Styles CHAPTER 9 Homework Problem Name On July 1, 2016, Morgan Company needs exactly $206,400 in cash to pay an existing obligation. Morgan has decided to borrow from North Bank, which charges 14% interest on loans. The loan will be due in one year. Morgan is not sure whether to ask the bank for (a) an interest-bearing loan with interest and principal payable at the end of the year or (b) a non-interest-bearing loan due in one year but with interest deducted in advance. What will be the face value of the note assuming that interest is paid when the loan is due? Interest is deducted in advance? Calculate the effective interest rate on the note assuming that: interest is pald when the loan is due: Interest is deducted in advance: Assume that Morgan negotiates and signs the one-year note with the bank on July 1, 2016. Also, assume that Morgan\'s accounting year ends December 31. Prepare all of the journal entries necessary to record the issuance of the note and the interest on the note assuming that Interest is paid when the loan is due

Solution

Part 1

Face Value of Notes Payable

If Interest is paid when the loan is due

$ 206,400.00

If Interest is deducted in advance

(206400-14%)

$ 177,504.00

Part 2

Effective rate of Interest

If Interest is paid when the loan is due

(28896/206400*100)

14.00%

If Interest is deducted in advance

(28896/177504*100)

16.28%

Part 3

Journal entries

If Interest is paid when the loan is due

.1 july 2016

Cash

$                   206,400.00

            Notes Payable

$ 206,400.00

(Notes Payable Issued)

.31 dec 2016

Interest Expense

$                     14,448.00

          Interest Payable

$    14,448.00

(Interest for half year )

.1 july 2017

Interest Expense

$                     14,448.00

Interest Payable

$                     14,448.00

Notes Payable

$                   206,400.00

           Cash

$ 235,296.00

(Notes payable repaid after 1 Year)

If Interest is deducted in advance

.1 july 2016

Cash

$                   181,549.44

Discount on Note Payable

$                     24,850.56

            Notes Payable

$ 206,400.00

(Notes Payable Issued)

.31 dec 2016

Discount on Note Payable

$                     14,448.00

          Interest Payable

$    14,448.00

(Interest for half year )

.1 july 2017

Discount on Note Payable

$                     14,448.00

          Interest Payable

$    14,448.00

(Interest for half year ended july 2017)

.1 july 2017

Notes Payable

$                   206,400.00

           Cash

$ 206,400.00

(Notes payable repaid after 1 Year)

Part 4

Balance sheet

July 1 2016

Assuming Interest is paid when loan is due.

Current Liabilities

Notes Payable

$                   206,400.00

Balance sheet

July 1 2016

Assuming Interest is deducted in advance

Current Liabilities

Notes Payable

$                   206,400.00

Less: Discount on Note Payable

$                     24,850.56

Net Value of Note Payable

$                   181,549.44

Part 1	Face Value of Notes Payable
	If Interest is paid when the loan is due		$ 206,400.00
	If Interest is deducted in advance	(206400-14%)	$ 177,504.00