On December 31, 2019, Cowboys Corp. sold product to Dolphins Limited, accepting a 5%, three-year promissory note of $750,000 in exchange. Interest is payable annually on December 31, starting December 31, 2020. Cowboys Corp. normally pays 6% interest to borrow funds. Dolphins Limited, however, normally pays 9% to borrow funds. The product sold is carried on Cowboys' books at a manufactured cost of $382,500.

Instructions

On Cowboys' books:

a. What interest rate should Cowboys used when performing calculation on this promissory note?Explain.

b. Prepare the required journal entries to record the transaction at December 31, 2019. Assume that the effective interest method is used. Round all values to the nearest dollar.

c. Prepare all appropriate entries for 2020 in relation to this note.

Prepare all appropriate entries for 2021 in relation to this note.