Question

Concept Review Exercise Cameron-Brown, Inc., constructed for Harmon Dis mn, Inc., constructed for Harmon Distributors a warehouse that was completed and ready for occupancy on January 2 2018. Harmon paid for the warehouse by issuing a $900,000, four-year note that required 7% interest to be paid on December 31 of each year. ine warehouse was custom-built for Harmon, so its cash price was not known. By compare 1son with similar transactions, it was determined that an appropriate interest rate was 10%. NOTE WITH AN NOTE INTEREST RATE UNREALISTIC rehouse by issuing a 792 SECTION 3 Liabilities and Shareholders' Equity Required: 1. Prepare the journal entry for Harmon's purchase of the warehouse on January 2, 2018 2. Prepare (a) an amortization schedule for the four-year term of the note and (b) the journal entry for Harmon's first interest payment on December 31, 2018 3. Suppose Harmon's note had been an installment note to be paid in four equal payments. What would be the amount of each installment if payable (a) at the end of each year, beginning December 31, 20187 or (b) at the beginning of each year, beginning on January 2, 2018? rator SUBMITTING A REGISTRATION FORM TO THE REGISTRAR'S OFFICE FOR VAUDA during Ope 630,ooo lypo

accountig

Answer 1

1. Annual interest payments = $ 900,000 x 7 % = $ 63,000.

Present value of interest payments = $ 63,000 x [ { 1 - ( 1 / 1.10 ) ⁴ } / 0.10 ] = $ 63,000 x 3.16987 = $ 199,702

Present value of principal = $ 900,000 x ( 1 / 1.10 ) ⁴ = $ 900,000 x 0.68301= $ 614,709

Total present value = $ 199,702 + $ 614,709 = $ 814,411

Date	Account Titles	Debit	Credit
		$	$
Jan 2, 2018	Warehouse	814,411
	Discount on Notes Payable	85,589
	Notes Payable		900,000

2. a.

Period	Amount Paid	Interest Expense	Discount Amortization	Outstanding Balance of Note Payable
0				$ 814,411
1	$ 63,000	81,441	18,441	832,852
2	63,000	83,285	20,285	853,137
3	63,000	85,314	22,314	875,451
4	63,000	87,549	24,549	900,000

b.

Date	Account Titles	Debit	Credit
		$	$
Dec 31, 2018	Interest Expense	81,441
	Discount on Notes Payable		18,441
	Cash		63,000

3. a. Amount of each installment payment ( ordinary annuity ) = $ 814,411 / 3.16987 = $ 256,923

b. Amount of each installment payment ( annuity due) = $ 814,411 / ( 3.16987 x 1.10) = $ 233,566