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Problem 7.2: Notes Payable - Discount Basis, Colombo Co.

On August 1, 2010, Colombo Co's treasurer signed a note promising to pay $240,000 on December 31, 2010. The proceeds of the note were $232,000.
a) Calculate the discount rate used by the lender.
b) Calculate the effective interest rate (APR) on the loan.
c) Write the journal entry to show the effects of
1. Signing the note and the receipt of the cash proceeds on August 1, 2010.
2. Recording interest expense for the month of September.
3. Repaying the note on December 31, 2010.

Accounting: What the Numbers Mean, 9th Edition. Part 1 Financial Accounting page 280. Exercise 7.2

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Solution Summary

The response contains an attached Excel file and shows the computation of the discount rate and the APR (annualized rate of interest). Journal entries are shown for the issue, the September interest, the December interest and the December repayment.