Question

On January 1, 2017, Bonita Company makes the two following acquisitions. 1. Purchases land having a fair value of $310,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $470,602. 2. Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $460,000 (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 Bonita Company for the two purchases on January 1, 2017. (b) Record the interest at the end of the first year on both notes using the effective-interest method.

Answer 1

Answer:

Explanation:

1. JOURNAL ENTRIES

1)

Dr Land 310,000  

Cr Discount on Notes Payable 160,602  

Cr Notes Payable  470,602

2)

Dr Equipment 332,635

Cr Discount on Notes Payable 127,365  

 Notes Payable  460,000

Calculation of equipment cost:

{($460,000*0.3909) + ($460,000*6%*5.5370)} = $179,814 + $152821 = $332,635

b)

1)

Dr Interest Expense (310,000*11%) 34,100  

Cr Discount on Notes payable  34,100

2)

Dr Interest Expense (332,635*11%) 36,590  

Cr Notes payable  8,990

Cr Cash (460,000*6%)  27,600