Question

On 3/1/2016, PeeDee Corp. signs a $400,000 6-month zero-interest bearing note. The prevailing market rate for similar transactions is 9%. PeeDee has a fiscal year end on June 30. prepare the entries to record the issuance of the note and any entries required during 2016.

Answer 1

WORKING NOTES:
	CALCULATION OF INTEREST ON SHORT TERM NOTE PAYABLE
		Par Value of Zero-interest bearing note	$                 4,00,000
		Period of Note	6 Months
		Interest for 6 Monts = $ 400,000 X 9% X 6 / 12 Month	$                    18,000
		Fiscal year ended as on	June , 30
		Period from 3/1/2016 to June 30 =	4 Months
		Interest upto 4 Months = $ 18,000 X 4 Month / 6 Month	$                    12,000
SOLUTION :
Journal Entries
Sr. No.	Date	Account Title and explanation	Debit	Credit
		Cash ($ 400,000 - $ 18,000)	$3,82,000
1	3/1/2016	Discount on Note Payable	$18,000
		Note Payable		$4,00,000
		(Record the issuance of note)
2	6/30/2016	Interest Expenses	$12,000
		Discount on Note Payable		$12,000
		(Record the adjusting entry at the fiscal year end)
		Note Payable	$4,00,000
3	8/31/2016	Interest Expenses ($ 18,000 - $ 12,000)	$6,000
		Discount on Note Payable		$6,000
		Cash		$4,00,000
		(Record the payment of short term note payable)