Question

On June 1, 2020, Whispering Winds Corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman was asking $258,000 for the land and Whispering Winds saw that there was some flexibility in the asking price. Whispering Winds did not have enough money to make a cash offer to Silverman and proposed to give, in return for the land, a $315,000, five-year promissory note that bears interest at the rate of 5%. The interest is to be paid annually to Silverman Corporation on June 1 of each of the next five years. Silverman insisted that the note taken in return become a mortgage note. Silverman accepted the amended offer, and Whispering Winds signed a mortgage note for $315,000 due June 1, 2025. Whispering Winds would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. Silverman, on the other hand, could borrow the funds at 9%. Both Whispering Winds and Silverman have calendar year ends.

1 & 2.

Using (1) factor tables. (2) a financial calculator, or (3) Excel function PV.calculate the purchase price of the land and prepare an effective interest amortization table for the term of the mortgage note payable that is given in the exchange. (Hint: Refer to Chapter 3 for tips on calculating) (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answers to decimal places, eg,5,275.) Purchase price of the land $ Mortgage Note Payable - Interest Amortization Cash Paid Interest Expense Discount Amortized Note Carrying Amount $ $ $ $ $

3.

4.

Answer 1

Land is purchased for $315,000, five-year promissory note that bears interest at the rate of 5%

Whispering Winds would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase.

On June 1, 2020 purchase price for Whispering Winds Corporation is fair value of promissory note:

Year	Cash flows
1	$15,750	315000*5% = 15750
2	$15,750
3	$15,750
4	$15,750
5	$15,750
5	$315,000
	$393,750

1. Purchase price of land i.e present value of cashflows=$255,295

Present value of cashflows = -PV(10%,5,15750)-PV(10%,5,0,315000)

2. Mortgage Note payable = interest amortisation
Cash paid (a)	Interest expense (b) = (d*10%)	Discount Amortisation (c=b-a)	Note carrying amount (d=last d+b-a)
			$255,295
$15,750	$25,530	$9,780	$265,075
$15,750	$26,507	$10,757	$275,832
$15,750	$27,583	$11,833	$287,665
$15,750	$28,767	$13,017	$300,682
$330,750	$30,068	$14,318	$0
	$138,455	$59,705

Calculation details

			$255,295
315000*5%	255295*10%	25530-15750	255295+25530-15750
315000*5%	265075*10%	26507-15750	265075+26507-15750
315000*5%	275832*10%	27583-15750	275832+27583-15750
315000*5%	287665*10%	28767-15750	287665+28767-15750
315000*5%+315000	300682*10%	30068-15750	300682+30068-15750
	$138,455	$59,705

3. Journal entry for purchase of land

Date	Account titles and explanation	Debit	Credit
June 1, 2020	Land	$255,295
	Five-year promissory note		$255,295
	(Being land purchase through issue of five-year promissory note recognised)

4. Adjusting for FY 2020 and first payment entry

Date	Account titles and explanation	Debit	Credit
December 31, 2020	Interest expense	$14,892		(25530/12*7)
	Interest expense payable		$9,188	(15750/12*7)
	Five-year promissory note - discount amount		$5,705	(14892-9188)
	(Being interest and discount accrued for five-year promissory note)
June 1, 2021	Interest expense	$10,637		(25530/12*5)
	Interest expense payable	$9,188
	Cash		$15,750
	Five-year promissory note - discount amount		$4,075	(10637-(15750/12*5))
	(Being interest for five-year promissory note paid)

Whispering Winds Corporation
(Partial) Statement of Financial Position
For the year ended December 31, 2020
Non-current liabilities
Five-year promissory note	$261,000
Current liabilities
Interest expense payable	$9,188