On January 1, 2014, Botosan Company issued a $1,239,000, 5-year, zero-interest-b

Question

On January 1, 2014, Botosan Company issued a $1,239,000, 5-year, zero-interest-bearing note to National Organization Bank. The note was issued to yield 10% 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 $826,000 of the principal at maturity. Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2014

Explanation / Answer

Answer:(a)

The entries for the issuance of the note on January 1, 2014:

The present value of the note is: $1,239,000 X .62092 = $769320

Botosan Company (Debtor) :

Cash. .................................................................. $769320

Discount on Notes Payable. ............................       469689

        To Note Payable. .............................................. 1,239,000

National Organization Bank (Creditor) :

Notes Receivable. ............................................ 1,239,000

         To Discount on Notes Receivable. .................                     469680

         To Cash. ............................................................                $769320

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