Question

On January 1, 2017, Cheyenne Company makes the two following acquisitions.

1.		Purchases land having a fair value of $310,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $470,602.
2.		Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $340,000 (interest payable annually on January 1).

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

(a)		Record the two journal entries that should be recorded by Cheyenne Company for the two purchases on January 1, 2017.
(b)		Record the interest at the end of the first year on both notes using the effective-interest method.

Answer 1

Record the interest at the end of the first year on both notes using the effective-interest method.

		DR	CR
a	Land	3,10,000
	Discount on Notes Payable.	1,60,602
	Notes Payable.		4,70,602
b	Equipment	2,45,870
	Discount on Notes Payable.		94,130
	Notes Payable.		3,40,000

	Amount	Pv factor 9%	PV
Interest Payment	20,400	5.5370475	112955.8
Maturity value	3,40,000	0.3909248	132914.4
Discount on Notes Payable.			245870.2

	DR	CR
Interest Expense	34100
Discount on Notes Payable.	.	34100
Interest Expense 245870*.11	27046
Discount on Notes Payable		6,646
Cash		20,400