Question

On January 1, Year 7, Ellen Paige Company makes the two following acquisitions: 1. Purchases land...

On January 1, Year 7, Ellen Paige Company makes the two following acquisitions:

1. Purchases land by issuing a 5-year, zero-interest-bearing promissory note in the face amount

    of $337,012.

2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of

    $250,000 (interest payable annually on December 31).

The company pays 11% interest to borrow funds from its bank.

Instructions:

Round all answers to the nearest dollar.

A. Prepare the two journal entries that should be recorded by Ellen Paige Company for the two

     purchases on January 1, Year 7.

B. Prepare the adjusting journal entries at December 31 to recognize interest expense on each

    debt obligation.

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Answer #1

Discount on Zero interest bearing Note=

337012*PVIF(11%,5)

337012*0.59345 = 200000

Issue price of the 6% Promissory note=

(250000*6%)*PVIFA(11%,8) + 250000*PVIF(11%,8)

(250000*6%)*5.1461 + 250000*0.4339 = 185667

A) Journal Entry:

Date

Acc Titles

Dr. $

Cr.$

Jan 1, year 7

Land

200000

Discount on Note Payable

137012

0% Note Payable

337012

(Purchase of land on issuance of Note face

with $337012, market rate 11% for 5 years)

Jan 1, year 7

Equipment

185667

Discount on Note Payable

64333

6% Note Payable

250000

(Purchase of equipment on issuance of Note

with par value $250000, market rate 11% for 8 years)

B) Adjusting Journal Entry:

Dec 31, year 1

Interest Expense

22000

Discount on Note Payable

22000

(200000*11%)

(Booking of interest on 0% Note)

Dec 31, year 1

Interest Expense

20423

Cash

15000

(250000*6%)

Discount on Note Payable

5423

(185667*11%) - (250000*6%) = 5423

(payment of annual interest on 6% Note)

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