iNTEREST EXPENSE AND ALTERNATIVE NOTES. Jacobi Corporation wishes to borrow $100,000 to finance the acquisition of new equipment at the beginning of 19x1. Two alternative notes are under consideration:

Note I: Note I requires five annual interest payments of $8,000 each, beginning 1 year after issuance; the final interest payment is made in five years (at maturity), together with the $100,000 repayment of principal.

Note II: Note II requires a single payment of $150,000 in 5 years (at maturity), which pays all interest and principal.

REQUIRED:

1. Assume that one of the notes is issued and $100,000 cash received on January 1, 19x1. Calculate the amount of interest expense for note I and note II to be reported for 19x1 and 19x2.

2. Assume that a note is issued and $100,000 cash received on April 1, 19x1. Calculate the amount of interest to be reported for notes I and II for 19x1 and 19x2.

3. With reference to your calculations for note II, explain the two-stage amortization and matching of interest in 19x1 and 19x2 if the note is issued on April 1, 19x1?

How does the process differ if note II is issued on January 1, 19x1?