Question

Meyer, Inc., issued a $50,000, 120-day, noninterest-bearing note on November 1, 2018, payable to the bank. At the date of discount, the bank's discount rate was 15 percent.Myer would prepare which of the following journal entries on December 31, 2018?

a) Interest Expense                 1,250
           Discount on Notes Payable   1,250

b) Interest Expense   1,250
           Cash                                  1,250

c) Interest Expense       1,250
          Interest Payable             1,250

d)Interest Payable                      1,250
          Discount on Notes Payable    1,250

Answer 1

Interest expense = 50,000 x 15% x 2/12

= $1,250

Non- interest bearing note is issued at a discount, No periodical cash payment is made for interest. Hence, Journal entry for interest expense on December 31, 2018 will be as under:

a) Interest Expense                 1,250
           Discount on Notes Payable   1,250

Correct option is a.

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