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
