Question

On January 1, 2020, Shamrock 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). The company has to pay 11% interest for funds from its bank. (a) Record the two journal entries that should be recorded by Shamrock 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 O 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 2. January 1, 2020 (b) 1. December 31, 2020

Answer 1

Solution:

Credit No. Date (a) 1. Jan. 1, 2020 Accounts Titles and Explanation Land Discount on notes payable Notes payable Debit $ $ 220,000 113,975 $ 333,975 2 Jan. 1, 2020 $ Equipment Discount on notes payable Notes payable 270,013 69,987 $ 340,000

Computation of value at which equipment is recorded in no. 2 journal entry above:

Equipment value = PV of all interest payments on notes + PV of Maturity value of Notes payable

= ($340,000*7%)*sum of pv factor @11% for 8 yrs. + $340,000/(1+.11)⁸

= $23,800*5.14612 + $147,535

= $122,477.66 + $147,535 = $270,013 (rounded off)

($220,000*11%) $ 24,200 (b) 1. Dec. 31, 2020 Interest Expense Dicount on notes payable $ 24,200 2 $ 29,701 Dec 31, 2020 Intereste Expense ($270,013*11%) Discount on notes payable Cash ($340,000*7%) $ $ 5,901 23,800