Question

On January 1, 2020, Sheffield Company makes the two following acquisitions.

1.		Purchases land having a fair value of $250,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $421,265.
2.		Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $380,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank.

(a)		Record the two journal entries that should be recorded by Sheffield Company for the two purchases on January 1, 2020.
(b)		Record the interest at the end of the first year on both notes using the effective-interest method

Answer 1

SOLUTION

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
A1.	Land	250,000
	Discount on Notes Payable	171,265
	Notes Payable		421,265
A2.	Equipment [(380,000*0.39092)+(380,000*6%*5.53705)]	274,794
	Discount on Notes Payable	105,206
	Notes Payable		380,000
B1.	Interest Expense	27,500
	Discount on Notes Payable (250,000*11%)		27,500
B2.	Interest Expense (274,794*11%)	30,227
	Notes Payable		7,427
	Cash (380,000*6%)		22,800

PVIFA (11%, 9) = 5.53705

PVF(11%,9) = 0.39092