Interest in Advance versus Interest Paid When Loan Is Due On July 1, 2008, Leach Company needs exactly $103,200 in cash to pay an existing obligation.

Leach has decided to borrow from State Bank, which charges 14% interest on loans. The loan will be due in one year. Leach is unsure, however, whether to ask the bank for

(a) an interest-bearing loan with interest and principal payable at the end of the year or

(b) a loan due in one year but with interest deducted in advance.

Required 1. What will be the face value of the note assuming that:

a. Interest is paid when the loan is due?

b. Interest is deducted in advance?

2. Calculate the effective interest rate on the note assuming that:

a. Interest is paid when the loan is due.

b. Interest is deducted in advance.
3. Assume that Leach negotiates and signs the one-year note with the bank on July 1, 2008. Also assume that Leach’s accounting year ends December 31. Prepare all of the journal entries necessary to record the issuance of the note and the interest on the note assuming that:

a. Interest is paid when the loan is due.

b. Interest is deducted in advance.
4. Prepare the appropriate balance sheet presentation for July 1, 2008, immediately after the note has been issued assuming that:

a. Interest is paid when the loan is due.

b. Interest is deducted in advance.