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.

#### Homework Answers

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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