Answer:
a) journal entry to record land purchase
January 1, 2020
Dr Land 360,000
Dr Discount on notes payable 246,621
Cr Notes payable 606,621
journal entry to record purchase of equipment
January 1, 2020
Dr Equipment 444,725.96
Dr Discount on notes payable 115,274.04
Cr Notes payable 560,000
present value of $560,000 using bank interest rate = $560,000 / 1.11⁸ = $242,998.84
annual interest payment = $560,000 x 7% = $39,200
PV of annuity = $39,200 x 5.1461 (PV annuity factor, 11%, 8 periods) = $201,727.12
total present value of notes payable = $242,998.84 + $201,727.12 = $444,725.96
discount on notes payable = $560,000 - $444,725.96 = $115,274.04
b) interest expense for the first notes payable (used to purchase land) = $360,000 x 11% = $39,600
December 31, 2021, accrued interest expense on notes payable 1
Dr Interest expense 39,600
Cr Discount on notes payable 39,600
interest expense for the second note
interest expense = $444,725.96 x 11% = $48,919.86
cash paid = $560,000 x 7% = $39,200
discount on notes payable = $48,919.86 - $39,200 = $9,719.86
December 31, 2021, accrued interest expense on notes payable 2
Dr Interest expense 48,919.86
Cr Cash (or interest payable) 39,200
Cr Discount on notes payable 9,719.86
