On January 1, 2017, Headland Company issued a $1,264,500, 5-year, zero-interest-bearing note to Sage Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Headland fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, Sage Bank decided that the loan was impaired. Headland will probably pay back only $843,000 of the principal at maturity.

1. Prepare journal entries for both Headland Company and Sage Bank to record the issuance of the note on January 1, 2017

2. Assuming that both Headland Company and Sage Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note

3. Compute the loss Sage Bank will suffer from Headlands financial distress on December 31, 20184.