Question

On January 1, 2017, Flounder 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 796, 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 jour nal entries that should be recorded by Flounder Company for the two purchases on (a) 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 1.2512 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the 0 for the amounts. Credit accoun indent manually.) 4 and the final answer to 0 t titles are automatically indented when amount is entered. Do No. Date Account Titles and Explanation Debit Credit 1. January 1, 2017 2. January 1, 2017

Answer 1

Journal Entry
	Account titles & Explanations			Debit	Credit
1	Land			$160,000.00
	Discount on notes payable			$ 91,763.00
	To Notes payable				$251,763.00
	(Being Land purchased)
2	Equipment			2,30,306
	discount on notes payable			$ 59,694.00
	To notes payable				$270,000.00
	(Being Equipment purchased)
	Calculation of issue price
	where n=8 year
	I = 12%
	Principal 270,000*.403883=				$109,048.41
	(use pv of $1 table) PFV of 12% for 8th year
	interest 270,000*7%*4.96764				$ 93,888.40
	(4.96764 = Sum of pVF of 12% for 8 years)
	total issue price				$202,936.81
b)	Recording of interest expense
	Account titles & Explanations			Debit	Credit
1	Interest expense			$ 19,200.00
	Discount on notes payable				$ 19,200.00
	((160,000*12%)
	(being Interest expense booked)
2	Interest expense			$ 24,352.42		[Issue Price*Intt rate] = [$202936.81*12%
	Discount on notes				$    4,052.42
	cash				$ 20,300.00	[290000*7%]
	(being Interest expense booked)