On January 2, a local bookstore borrowed from a bank on a 1-year note. The face value of the note was $80,000. However, the bank deducted its interest “in advance” at 5% of the face value.
Show the effects on the borrower’s records at inception and at the end of the year:
1. Using the balance sheet equation, prepare an analysis of transactions.
2. Prepare journal entries. Omit explanations.
3. What was the real rate of interest?