Question

Patrick Owens borrowed money by issuing two notes on March 1, 2013. The financing transactions are described here.
1. Borrowed funds by issuing a $40,000 face value discount note to Farmers Bank. The note had an 8 percent discount rate, a one-year term to maturity, and was paid off on March 1, 2014.
2. Borrowed funds by issuing a $40,000 face value, interest-bearing note to Valley Bank. The note had an 8 percent stated rate of interest, a one-year term to maturity, and was paid off on March 1, 2014.

Required
a. Show the effects of issuing the two notes on the financial statements using separate horizontal financial statement models like the ones here. Record the transaction amounts under the appropriate categories. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Record only the events occurring on the date of issue. Do not record accrued interest or the repayment at maturity.
Discount Note


Interest-Bearing Note


b. What is the total amount of interest to be paid on each note?
c. What amount of cash was received from each note when it was issued?
d. Which note has the higher effective interest rate? Support your answer with appropriatecomputations.


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  • CreatedOctober 26, 2013
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