Question

Triumph Motors had the following transactions in December 2019 that impacted their notes payable:

December 2.  Issued a $2,200,000 notes payable, maturity of 1 year, in exchange for $2,075,000 accounts payable balance.

December 5.  Purchased equipment and issued a $10 million, zero interest, 3 year notes payable. Triumph’s normal borrowing rate is 6%

December 15.  Issued a $3,000,000 5 year notes payable to Main Street Bank for cash.  The stated rate for the note is 5% and Triumph’s normal borrowing rate is 6%

1. For each transaction above, determine the issue price of the notes payable and prepare the appropriate journal entry.  (All interest payments are made annually)

Answer 1

Calculation of Issue prices:

Dec.2 : Issue price is $2,200,000

Dec.5 : Issue price = $10,000,000 x 0.83962 present value factor (6%, 3 years) = $8,396,200

Dec.15:

Interest payment = $3,000,000 x 5% = $150,000

Present value of interest payment	$631,854
[$150,000 x 4.21236 present value annuity factor (6%, 5 years)]
Present value of face value	$2,241,780
[$3,000,000 x 0.74726 present value factor (6%,5 years)]
Issue price	$2,873,634

Journal Entries:

Date	Account title and Explanation	Debit	Credit
Dec 2	Accounts payable	$2,200,000
	Notes payable		$2,200,000
	[To record issuance of note for accounts payable]
Dec 5	Equipment	$8,396,200
	Discount on notes payable	$1,603,800
	Notes payable		$10,000,000
	[To record purhcase of equipment in exchange of Zero-interest note]
Dec 15	Cash	$2,873,634
	Discount on notes payable	$126,366
	Bonds payable		$3,000,000
	[To record loan taken from bank by issuing note]