In June 2016, Goslyn 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.

Question

Quizplus · Accepted Answer

The difference between the face value ($15,000) and the cash received ($11,025) is considered a discount on the note. This discount is amortized over the life of the note (three years) using the effective interest method, which allocates interest expense in a way that results in a constant rate of interest over the period.

In June 2016, Goslyn Corporation Issued a Three-Year Non-Interest-Bearing Note