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

Question

Quizplus · Accepted Answer

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.

In June 2010, Gross Corporation Issued a Three-Year Non-Interest-Bearing Note