Question

Vaughn received a 4-year, 3%, $27,935 promissory note as consideration in an inventory sale transaction on that date. The note requires the customer to pay interest annually on December 31 (2021 through 2024). The going market rate of interest for comparable notes on the issue date was 5%. Vaughn uses the effective-interest method to amortize premiums and discounts on all of its promissory notes.

Give the interest and collection entries to make over the remaining term of the 4-year note. Prepare an amortization schedule as well.

Answer 1

First of all we have to find out the Face amount of the Note. Also since the market interest is more than the stated interest rate the note is issued at Discount
Now let's take the Face amount of Note as X then the Interest payment per year will be 0.03X
Table values are based on:
Face Amount	X
Interest Payment	0.03X
Market Interest rate per period	5.00%
Cash Flow	Table Value(PV of 5% for 4 period)	Amount	Present Value
PV of Interest	3.545950504	0.03X	0.106378515X
PV of Principal	0.822702475	X	0.822702475X
Issue Price of Bond			$27,935
So the equation is 0.92908099X =$27,935
So X(Face amount) =$27,935 / 0.92908099 =$30,067
Date	Cash Interest received($30,067*3%)	Interest Revenue	Discount amortized	Note carrying amount
Col I	Col II	Col III(Col V*5%)	Col IV(Col III - Col II)	Col V
Jan 1,2021				$                                27,935
Dec 31,2021	$                                                      902	$                                           1,397	$                                               495	$                                28,430
Dec 31,2022	$                                                      902	$                                           1,421	$                                               519	$                                28,949
Dec 31,2023	$                                                      902	$                                           1,447	$                                               545	$                                29,495
Dec 31,2024	$                                                      902	$                                           1,475	$                                               573	$                                30,067