Effective interest is practice to discount bond. The interest in this method is based on the amount of financial instrument’s book value at beginning of accounting period. This method is considered more accurate than straight line method on period to period basis.
Requirement 1
Date |
Particulars |
Debit ($) |
Credit ($) |
1. 1 Jan,2017 |
Land |
160,000 |
|
Discount on notes payable |
91,763 |
||
Notes payable |
251763 |
||
(To record purchase of land) |
|||
2. 1 Jan 2017 |
Equipment |
202,940.64 |
|
Discount on notes payable |
67,059.36 |
||
Notes payable |
270,000 |
||
Computation of discount on notes payable
Maturity value |
$ 270,000 |
|
Present value of note |
||
Present value of $ 270,000 due in 8 years at 12% - 270,000 * 0.4039 |
109,053 |
|
Present value of 270,000*7% = 18,900 payable annually at 12% = 18900*4.9676 |
93887.64 |
(202,940.64) |
Discount on notes payable (rounded off) |
67059.36 |
Requirement 2
Date |
Particulars |
Debit ($) |
Credit ($) |
1. Dec 31,2017 |
Interest expense |
19,200 |
|
Discount on notes payable (160,000 * 0.12) |
19,200 |
||
(To record interest expense) |
|||
2. Dec 31,2017 |
Interest expense |
43,252.88 |
|
Discount on notes payable (202,940.64 * 0.12) |
24,352.88 |
||
Cash (270,000 *0.07) |
18,900 |
||
(To record interest expense) |
kindly upvote
Exercise 14-16 On January 1, 2017, Martinez Company makes the two following acquisitions. 1. Purchases land...
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