Question

On January 1, 2017, Windsor Company makes the two following acquisitions. 1. Purchases land having a fair value of $220,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $333,975. 2. Purchases equipment by issuing a 7%, 8-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 Windsor 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. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) No. Date Account Titles and Explanation Debit Credit (a) 1. January 1, 2017 2. January 1, 2017 (b) 1. December 31, 2017 2. December 31, 2017

Answer 1

SOLUTION

1. JOURNAL ENTRIES

S.No.	Journal Entry	Debit ($)	Credit ($)
1.	Land	220,000
	Discount on Notes Payable	113975
	Notes Payable		333,975
	(To record purchase of land on note)
2.	Equipment	*270,003
	Discount on Notes Payable	69,997
	Notes Payable		340,000

*{($340,000*0.4339) + ($340,000*7%*5.1461)} =147,526 + 122,477= 270,003

2.

S.NO.	Journal Entry	Debit ($)	Credit ($)
1.	Interest Expense (220000*11%)	24,200
	Discount on Notes payable		24,200
2.	Interest Expense (270,003*11%)	29,700
	Notes payable		5,900
	Cash (340,000*7%)		23,800

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