On December 1, Spencer Department Store borrowed $19,250 from First Bank and Trust. Spencer signed a ninety-day note with a face amount of $20,000. The interest rate stated on the face of the note is 15 percent per year.
a. Provide the journal entry recorded by Spencer on December 1.
b. Provide the adjusting entry recorded by Spencer on December 31 before financial statements are prepared. Show how the note payable would be disclosed on the December 31 balance sheet.
c. Compute the actual annual interest rate on the note. (Hint: Note that Spencer had the use of $19,250 only over the period of the loan.)
d. Why is the actual interest rate different from the rate stated on the face of the note?