Question

Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2010, Moton Company needs exactly $206,400 in cash to pay an existing obligation. Moton has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Moton is unsure, however, whether to ask the bank for
(a) an interest-bearing loan with interest and principal payable at the end of the year or
(b) a non-interest-bearing loan due in one year but with interest deducted in advance.

Required
1. What will be the face value of the note assuming that:
a. Interest is paid when the loan is due?
b. Interest is deducted in advance?
2. Calculate the effective interest rate on the note assuming that:
a. Interest is paid when the loan is due.
b. Interest is deducted in advance.
3. Assume that Moton negotiates and signs the one-year note with the bank on July 1, 2010. Also, assume that Moton’s accounting year ends December 31. Identify and analyze the effect of the issuance of the note and the interest on the note assuming that:
a. Interest is paid when the loan is due.
b. Interest is deducted in advance.
4. Prepare the appropriate balance sheet presentation for July 1, 2010, immediately after the note has been issued assuming that:
a. Interest is paid when the loan is due.
b. Interest is deducted in advance.



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  • CreatedJanuary 12, 2012
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