Question

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

1.		Purchases land having a fair value of $360,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $566,467.
2.		Purchases equipment by issuing a 7%, 9-year promissory note having a maturity value of $520,000 (interest payable annually).

The company has to pay 12% interest for funds from its bank.

(a)		Record the two journal entries that should be recorded by Metlock 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.

(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, 2020	enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
2.	January 1, 2020	enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
(b) 1.	December 31, 2020	to record the interest on the first note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the first note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
2.	December 31, 2020	to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount

2. Sarasota Company commonly issues long-term notes payable to its various lenders. Sarasota has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Sarasota has elected to use the fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair value for these notes. Any changes in fair value are due to changes in market rates, not credit risk.

		Carrying Value		Fair Value
December 31, 2020		$52,200		$52,200
December 31, 2021		44,900		43,300
December 31, 2022		35,300		37,200

(a) Prepare the journal entry at December 31 (Sarasota’s year-end) for 2020, 2021, and 2022, to record the fair value option for these notes. (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.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022

(b) At what amount will the note be reported on Sarasota’s 2021 balance sheet?

Note to be reported on Sarasota’s 2021 balance sheet

$

(c) What is the effect of recording the fair value option on these notes on Sarasota’s 2022 income?

The effect of recording the fair value option would result in unrealized holding gainloss of

$

Answer 1

Journal Entry Answer Accounts Title and Explanation Date Credit Debit a Jan, 01 2020 Land $360,000 Discount on Notes Payable ($566,467- $360,000) $206,467 $566,467 Notes Payable (To record the purchase of land) Jan, 01 2020 Equipment Discount on Notes Payable ($520,000- $381,466) $381,466 $138,534 $520,000 Notes Payable (To record the purchase of Equipment) Interest Expense ($360,000 x 12%) b Dec, 31 2020 $43,200 Discount on notes payable $43,200 (To record the interest expense for the first year) Interest Expense ($381,466 x 12%) Dec, 31 2020 $45,776 Cash ($520,000 x 7%) Discount on notes payable ($45,776 - $36,400) $36,400 $9,376 (To record the interest expense for the first year) Calculation of Present Value of Machine Explanations Annual interest payment $520,000 x 7% = $36,400 Present Value of Equipment Interest x PVAF(12%, 9 years) Principal x PVIF (12%, 9 year) = $36,400 x 5.32825$520,000 x 0.36061 =$193,949+$187,517 =$381,466

a Journal Entry Answer Accounts Title and Explanation --No Entry- Date Debit Credit Dec, 31 2020 Dec, 31 2021 Notes Payable $1,600 $1,600 Unrealized Holding Gain or Loss - Income (To record the unrealized gain or loss) Dec, 31 2022 Unrealized Holding Gain or Loss Income $3,500 Notes Payable $3,500 (To record the unrealized gain or loss) b Notes Payable to be reported on Marin's 2021 Balance Sheet is $43,300 c The effect of recording the fair value option would result in unrealized holding loss of $3,500 Explanation change in Unrealized Carrying Fair Unrealized Year Ending Holding Gain or Loss Value Value Holding Gain or Loss $52,200 $52,200 $44,900 $43,300 $35,300 $37,200 $0 $0 2020 $1,600 ($1,900) $1,600 2021 ($3,500) 2022