Question

On January 1, 2020, Pearl Company makes the two following acquisitions.

1.		Purchases land having a fair value of $360,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $566,467.
2.		Purchases equipment by issuing a 7%, 9-year promissory note having a maturity value of $520,000 (interest payable annually).

The company has to pay 12% interest for funds from its bank.

(a)		Record the two journal entries that should be recorded by Pearl 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 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 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	enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the first purchase on January 1, 2017	enter a debit amount	enter a credit amount
2.	January 1, 2020	enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
		enter an account title to record the second purchase on January 1, 2017	enter a debit amount	enter a credit amount
(b) 1.	December 31, 2020	to record the interest on the first note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the first note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
2.	December 31, 2020	to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount
		to record the interest on the second note using the effective-interest method on December 31, 2017	enter a debit amount	enter a credit amount

Answer 1

No,	Date	Account titles and explanation	Debit	Credit
(a)
1.	Jan 1, 2020	Land	$360000
		Discount on notes payable (566467-360000)	$206467
		Note payable		$566467
		(To record land purchased)
2	Jan 1, 2020	Equipment	$381465
		Discount on notes payable (520000-381465)	$138535
		Notes payable		$520000
		(To record equipment purchased)
(b)
1	Dec 31, 2020	Interest expense (360000*12%)	$43200
		Discount on Notes payable		$43200
		(To record interest)
2	Dec 31, 2020	Interest expense (381465*12%)	$45776
		Interest payable (520000*7%)		$36400
		Discount on Notes payable (45776-36400)		$9376
		(To record interest)

Calculation of the Present value of Notes payable of Equipment

Present value of $520000 in 9 years @ 12% (520000*0.36061)	$187517
Present value of (520000*7%)= 36400 for 9 years @10% annually (36400*5.32825)	193948
Present value of Notes payable of Equipment	$381465

0.36061, is the Present value of $1 in 9 years @ 12%

5.32825, is the Present value of ordinary annuity for 9 years @ 12%