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Interest-bearing and non-interest-bearing notes

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(Interest-Bearing and Non-interest-Bearing Notes) Little Crop. Was experiencing cash flow problem and was unable to pay its $105,000 account payable to big Crop. when it fell due on September 30, 2020. Big agreed to substitute a one year note for the open account. The follong two options were presented to little by Big Crop:

Option1: A one year note for $105,000 due September 30, 2021. Interest at a rate of %8 would be payable at maturity.

Option 2: A one -year non- interest-bearing note for $113,400. The implied rate of interest is 8%. Assume the Big Crop . has a December 31 year end.

Instructions

a. Assuming little Crop. Chooses option1,prepare the entries required on big crops books on september 30,2020 desember 31,2020 and september 30,2021.

b. . Assuming little Crop. Chooses option2,prepare the entries required on big crops books on September 30,2020 December 31,2020 and September 30,2021.

c. Compare the amount of interest income entered by big crop. in 2020 and 2021 under both options. Comment briefly.

d. Digging deeper from management perspective does one option provide better liquidity for big at December 31 2020? Does one option provide better cash flow than the other?

Reference no: EM132420732

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