Question

Marks]

3. On December 31, 2017, Laser Inc. acquired a machine from Rocky Corporation by issuing a $600,000, non–interest-bearing note that is payable in full on December 31, 2021. The company’s credit rating permits it to borrow funds from its several lines of credit at 10%. The machine is expected to have a five-year life and a $70,000 residual value.

(a) Calculate the value of the note and prepare the journal entry for the purchase on December 31, 2017. [2 Marks]

(b) Prepare any necessary adjusting entries related to depreciation of the asset (use straight-line) and amortization of the note (use the effective interest method) on December

2. Dickinson Limited issued 10-year, 7% debentures with a face value of $2 million on January 1, 2010. The proceeds received were $1.7 million. The discount was amortized on the straight-line basis over the 10-year term. The terms of the debenture stated that the debentures could be redeemed in full at any point before the maturity date, at a price of 105 of the principal. There was no requirement for a sinking fund. On January 1, 2017, Dickinson issued a mortgage at 101 with a principal of $3 million secured by land and building. The mortgage had a 25-year amortization period, with interest payable at 8%. Upon issuance of the mortgage, Jeremiah used the proceeds to redeem the 7% debentures. Prepare journal entries to record the issuance of the 8% mortgage and the retirement of the 7% debentures. [5 Mark

Answer 1

A	Cost of asset	6,00,000.00
B	Residual life	70,000.00
C	Useful life	5 Years
D	Depreciation (A-B/C)	5,86,000.00
E	Interest cost (A*10%)	60,000.00
Journal Entries		Debit	Credit
A	machine A/c	Dr	6,00,000.00
	To Cash a/c			6,00,000.00
	(Being machine purchased)
B	Depreciation a/c	Dr	5,86,000.00
	To machine a/c			5,86,000.00
	(Being depreciation provided)
C	Interest cost a/c		60,000.00
	To cash a/c			60,000.00
	(Being interest on loan provided)