Problem related to effective interest rate

Reference no: EM13127446

Mondovi Winery borrowed $20 million cash on December 1, 2011, to provide working capital for year-end inventory. Mondovi Winery issued a 4-month, 9% promissory note to Silicon Valley Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm's fiscal period is the calendar year.

Required:

1. Prepare the journal entries to record (a) the issuance of the note by Mondovi Winery and (b) Silicon Valley receivable on December 1, 2011.

2. Prepare the journal entries by both firms to record all subsequent events related to the note through March 31, 2012.

3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entries to record the issuance of the noninterest-bearing note by Mondovi Winery on December 1, 2011. What would be the effective interest rate?

Reference no: EM13127446

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