Question

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

1.		Purchases land having a fair value of $280,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $425,060.
2.		Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $370,000 (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 Carla 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

Answer:

Carla Company
Journal Entry
No.	Date	Account Title	Debit ($)	Credit ($)
(a.) 1.	1/1/17	Land	$280,000
		Discount on Notes Payable	$145,060
		Notes Payable		$425,060
2.	1/1/17	Equipment([$370,000 * .43393 = $160554.1] +[$370,000 * 7% * 5.14612 = $133284.5]	$293,839
		Discount on Notes Payable	$76,161
		Notes Payable		$370,000
(b.) 1.	12/31/17	Interest Expense(280,000 * 11% = $30,800)	$30,800
		Discount on Notes Payable		$30,800
2.	12/31/17	Interest Expense(293,839 * 11% = )	$32,322
		Notes Payable		$6,422
		Cash(370,000 * 7% = 27,600)		$25,900

NOTE:

PVIFA (11%, 8) = 5.14612

PVF(11%,8) = 0.43393