PROBLEM B$\mathrm{.}5$

Valuation of a Note Payable

On December $1,$ Showcase Interiors purchased a shipment of furniture from Colonial House by paying $$10,500$ cash and issuing an installment note payable in the face amount of $$28,800.$ The note is to be paid in $24$ monthly installments of $$1,200$ each. Although the note makes no mention of an interest charge, the rate of interest usually charged to Showcase Interiors in such transactions is $1(1)/(2)$ percent per month.

Instructions

Compute the present value of the note payable, using a discount rate of $1(1)/(2)$ percent per month.

Prepare the journal entries in the accounts of Showcase Interiors on:

December $1,$ to record the purchase of the furniture $($debit Inventory$).$

December $31,$ to record the first $$1,200$ monthly payment on the note and to recognize interest expense for one month by the effective interest method. $($Round interest expense to the nearest dollar.$)$

Show how the liability for this note would appear in the balance sheet at December $31.($Assume that the note is classified as a current liability.$)$