Borrowed funds by issuing a $31,600 face value discount note to Farmers Bank. The note had an 8.75 percent discount rate, a one-year term to maturity, and was paid off on March 1, Year 2.

Borrowed funds by issuing a $31,600 face value, interest-bearing note to Valley Bank. The note had an 8.75 percent stated rate of interest, a one-year term to maturity, and was paid off on March 1, Year 2.

Required A

Show the effects of issuing the interest bearing note on the financial statements using separate horizontal financial statement models. Record the transaction amounts under the appropriate categories. Record only the events occurring on the date of issue. Do not record accrued interest or the repayment at maturity. Note: Enter any decreases to account balances and cash outflows with a minus sign. In the Statement of Cash Flows column, use the initials (OA) to designate operating activity, (IA) for investing activity, and (FA) for financing activity.

Event

Balance Sheet

Income Statement

Statement of Cash Flows

Assets

=

Liabilities

+

Equity

Revenue

Expense

=

Net Income

Cash

=

Notes Payable

+

Retained Earnings

=

2.

=

+

=

Required B

What is the total amount of interest to be paid on each note?

Discount Note
Interest-bearing note

Required C

What amount of cash was received from each note when it was issued?

Discount Note
Interest-bearing note

Required D1

Calculate the effective interest rate of each note.

Discount note		%
Interest-bearing note		%

Required D2

Which note has the higher effective interest rate?