Question

Blossom Ltd. issued an installment note on January 1, 2020 (with a required yield of 8%) in exchange for land that it purchased from Safayeni Ltd. Safayeni’s real estate agent had listed the land on the market for $125,000. The note calls for three equal blended payments of $44,624 that are to be made at December 31, 2020, 2021, and 2022. (You. may use facctor table of the present value of 1 and the factor table of the present value of annuity of 1)

A.) Prepare an effective-interest amortization table for the installment note for the three-year period.

B.) Prepare Blossom’s journal entry for the purchase of the land.

C.) Prepare Blossom’s journal entry for the first installment payment on the note on December 31, 2020.

Answer 1

Solution A:

Fair value of Land = Present value of installment note = $44,624 * Cumulative PV factor at 8% for 3 periods

= $44,624 * 2.57710 = $115,000

Note Amortization Schedule
Date	Cash paid	Interest expense	Decrease in carrying value	Carrying value
1-Jan-20				$115,000
31-Dec-20	$44,624	$9,200	$35,424	$79,576
31-Dec-21	$44,624	$6,366	$38,258	$41,318
31-Dec-22	$44,624	$3,305	$41,319	$0

Solution B:

Journal Entries - Blossom Ltd
Date	Particulars	Debit	Credit
1-Jan-20	Land	$115,000.00
	To Notes Payable		$115,000.00
	(To record borrowings from bank)

Solution C:

Journal Entries - Blossom Ltd
Date	Particulars	Debit	Credit
31-Dec-20	Interest expense Dr	$9,200.00
	Notes payable Dr	$35,424.00
	To Interest payable		$44,624.00
	(To record installment payment)