Question

On june 1, 2017, MacDougall corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman was asking 240,00 for the land and MacDougall saw there was some flexibility in the asking price. Macdougall did not have enough money to make the cash offer to Silverman and proposed to give, in return for the land, a 300,00$, five year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to Silverman Corporation on june 1 of the next 5 years. Silverman insisted that the note taken in retune become a mortgage note. Silverman accepted the amended offer, and MacDougall signed a mortgage note for 300,000 due june 1, 2022. MAcDouagll would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. Silverman on the other hand, could borrow the funds at 9%. Both Macdougall and Silverman have calendar ends year

1. Calculate the purchase price of the land and effective-interest amortization table for the term of the mortgage note payable that is given in the exchange
2. How would MacDougall determine a value for the land in recording a purchase from Silverman Corporation
3. What is the difference between a promissory note payable and a mortgage note payable? Why would Silverman demand a Mortgage note payable?

4. Assume that Silverman had insisted on obtaining an instalment note from MacDougall instead of a mortgage note. Calculate the purchase price of the land. Then do the following:

a) Calculate the amount of the instalment payments that would be required for a five-year instalment note.

b) Prepare the journal entry for the purchase of the land and the issuance of the instalment note.

c) Prepare any adjusting journal entry that is required at the end of the fiscal year and the first payment made on June 1, 2018, assuming no reversing entries are used.

d) Prepare an effective-interest amortization table for the five year term of the installment note

Answer 1

A.	Calculations of the amount of the instalment payments that would be required for a five-year instalment note.
	Loan Amount	30,000	P
	Loan Term (Years)	5	N
	Rate of Interest	4%	R
	And the Forluma For the the Installment is as mentioned below
	Installament = [P x R x (1+R)^N]/[(1+R)^ (N-1)]
	Installment Value =	6739
B.	Journal entry for the purchase of the land and the issuance of the instalment note.
		Debit	Credit
	Land Account	30,000
	promissory note @ rate of 4% Account		30,000
C.	Adjusting journal entry at the end of the fiscal year and the first payment made on June 1, 2018
		Debit	Credit
	promissory note @ rate of 4% Account	5539
	Interest Expenses Account	1200
	Bank Account		6739
D.	Effective-interest amortization table for the five year term of the installment note
	Instalment Value	Interest Payable	Principal Payable
	6,739	1,200	5,539
	6,739	978	5,760
	6,739	748	5,991
	6,739	508	6,230
	6,739	259	6,480
	33,694	3,694	30,000