Question

At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. (FV of $1, PV of $1, FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. The company issued a two-year, 20%, $670,000 note in exchange for a tract of land. The current market rate of interest is 20%. 2. Lambert acquired some office equipment with a fair value of $122,833 by issuing a one-year, $134,000 note. The stated interest on the note is 10%. The current market rate of interest is 20%. 3. The company purchased a building by issuing a four-year installment note. The note is to be repaid in equal installments of $1 million per year beginning one year hence. The current market rate of interest is 20%. Required: Prepare the journal entries to record each of the three transactions and the interest expense at the end of the first year for each. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.)

Answer 1

Prepare journal entries as follows:

Trn. Credit General Journal Land Notes payable Debit $670,000 $670,000 $134,000 Interest Expense Cash (S670,000 20%) $134,000 Office Equipment Discount on notes payable Notes payable $122.833 $11,167 $134,000 $24,567 Interest expense Discount on notes payable Cash ($134,000 10%) $11,167 $13,400 $134.000 Note payable Cash $134,000 $482.250 Building Note payable (See W.N) $482.250 Interest Expense Note payable Cash $517,750 $482,250 $1,000,000

Working note: PVAF(20%, 4 year) = 2.58873 PVF(20%, 4 years) = 0.48225 Note payable = $1,000,000 > PVF(20%, 4 years) = $1,000,000 0.48225 = $482.250 Calculate Interest Expense $1,000,000 > 20% = $200,000 Interest Expense = $200,000 PVAF(20%, 4 years) = $200.000 x 2.58873 = $517.750