Required:

1. Prepare the appropriate journal entry to record the issuance of the note.

2. Determine the effective interest rate.

Answer:

(1.)	Issuance of the note:
	Cash	85,500
	Discount on notes payable*	4,500
	Note payable		90,000
	*($90,000 x 10% x 6/12)
(2.)	Effective interest rate:
	The effective interest rate is: ($4,500/$85,500) x 12/6 = 10.53%

Learning Objective: 2 Level of Learning: 3

112. On November 1, 2006, a $216,000, 9-month, noninterest-bearing note is discounted at the bank at a 10% discount rate.

Required:

1. Prepare the appropriate journal entry to record the issuance of the note.

2. Determine the effective interest rate.

3. Prepare the appropriate journal entry on December 31, 2006, to record interest on the note for the 2006 financial statements.

4. Prepare the appropriate journal entry(s) on July 31, 2007, to record interest and the payment of the note.

Answer:

(1.)	Issuance of the note (November 1, 2006):
	Cash	199,800
	Discount on notes payable*	16,200
	Note payable		216,000
	*($216,000 x 10% x 9/12)
(2.)	Effective interest rate:
	The effective interest rate is: ($16,200/$199,800) x 12/9 = 10.81%
(3.)	Adjusting entry (December 31, 2006):
	Interest expense	3,600
	Discount on notes payable		3,600
	($216,000 x 10% x 2/12)
(4.)	Maturity (July 31, 2007)
	Interest expense	12,600
	Discount on notes payable		12,600
	($216,000 x 10% x 7/12)
	Notes payable (face amount)	216,000
	Cash		216,000

Learning Objective: 2 Level of Learning: 3

113. On June 30, 2006, Chu Industries issued 9-month notes in the amount of $700,000. Assume that interest is payable at maturity in the following three independent cases:

	Interest rate	Fiscal Year End
(1.)	9%	December 31
(2.)	6%	August 31
(3.)	12%	October 31