On January 1, 2018, Vaughn Manufacturing sold property to Cullumber Company. There was no established exchange...
On January 1, 2018, Vaughn Manufacturing sold property to
Cullumber Company. There was no established exchange price for the
property, and Cullumber gave Vaughn a $6300000
zero-interest-bearing note payable in 5 equal annual installments
of $1260000, with the first payment due December 31, 2018. The
prevailing rate of interest for a note of this type is 9%. The
present value of the note at 9% was $4901022 at January 1, 2018.
What should be the balance of the Discount on Notes Payable account
on the books of Cullumber at December 31, 2018 after adjusting
entries are made, assuming that the effective-interest method is
used?
| $957886. |
| $1398978. |
| $998553. |
| $0. |
Homework Answers
Solution:
Interest expense on 31.12.2018 = $4,901,022 * 9% = $441,092
Balance in discount on notes payable on 31.12.2018 = ($6,300,000 - $4,901,022 - $441,092) = $957,886
Hence first option is correct.
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