Question

Exercise 14-16 On January 1, 2017, Martinez Company makes the two following acquisitions. 1. Purchases land having a fair value of $160,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $251,763. 2. Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $270,000 (interest payable annually on January 1). The company has to pay 12% interest for funds from its bank. Record the two journal entries that should be recorded by Martinez Company for the two purchases on January 1, 2017. (b) Record the interest at the end of the first year on both notes using the effective-interest method. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter o for the amounts, Credit account titles are automatically indented when amount is entered. Do not indent manually. No. Date Account Titles and Explanation Debit Credit (a) 1. January 1, 2017 Land 160000 Discount on Notes Payable 91763 Notes Payable 251763 2. January 1, 2017 Equipment Discount on Notes Payable Notes Payable 270000 (b) 1. December 31, 2017 Interest Expense 19200 Discount on Motor Diablo 19200

Answer 1

Effective interest is practice to discount bond. The interest in this method is based on the amount of financial instrument’s book value at beginning of accounting period. This method is considered more accurate than straight line method on period to period basis.

Requirement 1

Date	Particulars	Debit ($)	Credit ($)
1. 1 Jan,2017	Land	160,000
	Discount on notes payable	91,763
	Notes payable		251763
	(To record purchase of land)
2. 1 Jan 2017	Equipment	202,940.64
	Discount on notes payable	67,059.36
	Notes payable		270,000

Computation of discount on notes payable

Maturity value		$ 270,000
Present value of note
Present value of $ 270,000 due in 8 years at 12% - 270,000 * 0.4039	109,053
Present value of 270,000*7% = 18,900 payable annually at 12% = 18900*4.9676	93887.64	(202,940.64)
Discount on notes payable (rounded off)		67059.36

Requirement 2

Date	Particulars	Debit ($)	Credit ($)
1. Dec 31,2017	Interest expense	19,200
	Discount on notes payable (160,000 * 0.12)		19,200
	(To record interest expense)
2. Dec 31,2017	Interest expense	43,252.88
	Discount on notes payable (202,940.64 * 0.12)		24,352.88
	Cash (270,000 *0.07)		18,900
	(To record interest expense)

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