Question

On January 1, 2020, Carter Company makes the two following acquisitions. 1. Purchases land having a fair value of $ 200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $337,012. 2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (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 Carter 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 o decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account tities 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 2. December 31, 2020

Answer 1

Answer:

(a) Record the two journal entries that should be recorded by Carter Company for the two purchases on January 1, 2020.

1) January 1, 2020, land is purchased by issuing zero-interest-bearing note

Dr Land 200,000

Dr Discount on notes payable 137,012

    Cr Notes payable 337,012

2) January 1, 2020, equipment is purchased by issuing interest-bearing note.

Dr Equipment 250,000

    Cr Notes payable 250,000

(b) Record the interest at the end of the first year on both notes using the effective-interest method.

1) December 31, 2020, accrued interest on zero-interest-bearing note

Dr Interest expense 22,000

    Cr Discount on notes payable 22,000

Interest expense = $200,000 x 11% = $22,000

2) December 31, 2020, interest expense on interest-bearing note

Dr Interest expense 15,000

    Cr Cash 15,000.

Interest expense = $250,000 x 6% = $15,000