Asked by Rogelio De Santiago on May 13, 2024
Verified
In June 2010, Gross Corporation issued a three-year non-interest-bearing note with a face value of $15, 000 and received cash of $11, 025.00 in exchange.The difference between the face value and the cash proceeds is accounted for as
A) a premium and amortized over three years by the effective interest method
B) interest expense in the current year
C) a discount and amortized over three years by the effective interest method
D) a discount and amortized over three years by the straight-line method
Non-interest-bearing Note
A promissory note in which no interest is earned or paid over the life of the note, with the borrower repaying only the face value of the note.
Straight-line Method
A depreciation method that allocates an equal portion of the cost of a fixed asset to each year of its useful life.
- Acquire knowledge on the standards for acknowledging interest revenue and expenditures linked to non-interest bearing notes.
Verified Answer
TB
Talasila Bharat ChowdaryMay 17, 2024
Final Answer :
C
Explanation :
The difference between the face value and the cash proceeds is $3,975 ($15,000 - $11,025). Since the note is non-interest-bearing, the $3,975 difference is considered a discount. This discount is then amortized over the three-year life of the note by the effective interest method, which takes into account the time value of money. Therefore, option C is the correct choice. Option A is incorrect because a premium is when the cash received is greater than the face value of the note. Option B is incorrect because the note is non-interest-bearing, so there is no interest expense. Option D is incorrect because the straight-line method does not take into account the time value of money.
Learning Objectives
- Acquire knowledge on the standards for acknowledging interest revenue and expenditures linked to non-interest bearing notes.