Question

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

1.		Purchases land having a fair value of $290,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $467,048.
2.		Purchases equipment by issuing a 7%, 9-year promissory note having a maturity value of $450,000 (interest payable annually).

The company has to pay 10% interest for funds from its bank.

(a)		Record the two journal entries that should be recorded by Sandhill 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 O decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Account Titles and Explanation Debit Credit No. Date (a) 1. January 1, 2020 2. January 1, 2020 (b) 1. December 31, 2020 2. December 31, 2020 Click if you would like to Show Work for this question: Open Show Work

Answer 1

Answer:

No.	Date	Accounts titles and Explanation	Debit ($)	Credit ($)
a) 1.	Jan 1, 2020	Land	2,90,000
		Discount on notes payable	1,77,048
		Notes payable		4,67,048
		(To record land purchased)
a) 2.	Jan 1, 2020	Equipment	3,72,254
		Discount on notes payable	77,746
		Notes payable		4,50,000
		(To record equipment purchased)
		PV of the amounts payable:
		Maturity value = 450,000/1.10^9 =	1,90,845
		Interest = 450000*7%*(1.10^9-1)/(0.10*1.10^9) =	1,81,409
			3,72,254
b) 1.	Dec 1, 2020	Interest expense (290,000*10%)	29,000
		Discount on notes payable		29,000
		(To record interest)
b) 2.	Dec 1, 2020	Interest expense (372,253*10%)	37,225
		Discount on notes payable		5,725
		Interest payable (450,000*7%)		31,500
		(To record interest)