Earl Rix, President of Rix Driving Range and Health Club has provided you with the following lowing information:

The stated annual interest rate on the notes is 10 percent, and interest is paid annually on December 31. The $95,000 in interest expense is due solely on these notes. While reviewing the company's 2013 financial statements, Mr. Rix is having difficulty understanding why the amount charged to interest expense does not equal the amount of cash actually disbursed during 2013 in payment of the interest on these notes.
Required:
(a) Assuming that Rix Driving Range and Health Club makes all of its interest payments on time, how much cash was actually disbursed during 2013 for interest payments of this notes?
(b) Explain to Mr. Rix why interest expense does not equal the amount of cash disbursed for interest. What does the difference between the cash disbursed and the amount charged as interest expense represent?
(c) What was the effective interest rate at time the notes were issued?
(d) Provide the journal entry to record the payments of interest on December 31.2013.

Transcribed Image Text:

2013 2012 Balance Sheet Notes payable Less: Discount on notes payable Income Statement Interest expense S800,000 S800,000 55.000 70,000 S 95,000