Question

Steve Acrobats lent $13,798 to Donaldson, Inc., accepting Donaldson's 2-years, $17,000, zero-interest-bearing note. The implied interest rate is 11%. Prepare Steve's journal entries for the initial transaction, recognition of interest each year, and the collection of $17,000 at maturity. (Round answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.) No. Account Titles and Explanation Credit Debit 1. (To record the initial transations) 2. (To record the recognition of interest in year one) 3. (To recognize the interest in year 2) 4. (To record the collection of the note)

Answer 1

1)

Cash	$13,798
Discount on note (17000 - 13798)	3,202
Note payable		$17,000
(To record initial transaction)

2)

Interest expense (3202/2)	$1,601
Discount on note		$1,601
(To record recognition of interest in year 1)

3)

Interest expense (3202/2)	$1,601
Discount on note		$1,601
(To record recognition of interest in year 2)

4)

Note payable	$17,000
Cash		$17,000
(To record the collection of note)