C

The note should not be recorded at its face amount because its stated interest rate of 16% does not approximate the market rate of interest of 11% for similar notes. APB 21 requires that when a note which does not bear the market rate of interest is exchanged for property, goods, or services, the note is to be recorded at the fair value of the property, goods, or services or the fair value of the note, whichever is more clearly determinable. Since neither of these amounts are determinable for the note in question, the note should be recorded at its present value. The interest rate to be used in the discounting process is the borrower's incremental borrowing rate (market rate) at the date the note is issued (11% in this case). Because the market rate of 11% is less than the stated rate of the note of 16%, the present value of the note is greater than the face amount of the note. Therefore, the correct journal entry at the date the note was issued would involve a debit to Purchases for the present value of the note, a credit to Note Payable for the face amount of the note, and a credit to Premium on Note Payable for the excess of the note's present value over its face amount. Fleur recorded the purchase at the note's face amount whichunderstated the cost of the merchandise which was subsequently sold in the prior year. Therefore, prior year cost of goods sold is understated by the amount of the unrecorded premium on the note (i.e., the excess of the note's present value over its face amount).

Can anybody help me with the entries for this problem? What exactly is the face amount? Does the problem mean the machandise were recorded at the face amount discounted with the stated interest rate on the note payable?