Question 7 On January 1, 2014, Botosan Company issued a $1,234,500, 5-year, zero
ID: 2425063 • Letter: Q
Question
Question 7
On January 1, 2014, Botosan Company issued a $1,234,500, 5-year, zero-interest-bearing note to National Organization Bank. The note was issued to yield 9% annual interest. Unfortunately, during 2015 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2015, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $823,000 of the principal at maturity.
(a)
No.
Account Titles and Explanation
Debit
Credit
Botosan Company (Debtor):
National Organization Bank (Creditor):
Question 7
On January 1, 2014, Botosan Company issued a $1,234,500, 5-year, zero-interest-bearing note to National Organization Bank. The note was issued to yield 9% annual interest. Unfortunately, during 2015 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2015, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $823,000 of the principal at maturity.
Explanation / Answer
Answer:(a)
The entries for the issuance of the note on January 1, 2014:
The present value of the note is: $1,234,500 X .64993 = $802339
Botosan Company (Debtor) :
Cash. .................................................................. 802339
Discount on Notes Payable. ............................ 432161
To Note Payable. .............................................. 1,234,500
National Organization Bank (Creditor) :
Notes Receivable. ............................................ 1,234,500
To Discount on Notes Receivable. ................. 432161
To Cash. ............................................................ 802339
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