Question

On January 1, 2017, Sheffield Company makes the two following acquisitions. 1. Purchases land having a fair value of $150,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $252,759. 2. Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $180,000 (interest payable annually on January

1). The company has to pay 11% interest for funds from its bank.

(a) Record the two journal entries that should be recorded by Sheffield 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

No,	Date	Account titles and explanation	Debit	Credit
(a)
1.	Jan 1, 2017	Land	$150000
		Discount on notes payable (252759-150000)	$102759
		Note payable		$252759
		(To record land purchased)
2	Jan 1, 2017	Equipment	$130166
		Discount on notes payable (180000-130166)	$49834
		Notes payable		$180000
		(To record equipment purchased)
(b)
1	Dec 31, 2017	Interest expense (150000*11%)	$16500
		Discount on Notes payable		$16500
		(To record interest)
2	Dec 31, 2017	Interest expense (130166*11%)	$14318
		Interest payable (180000*6%)		$10800
		Discount on Notes payable (14318-10800)		$3518
		(To record interest)

Calculation of the Present value of Notes payable of Equipment

Present value of $180000 in 9 years @ 11% (180000*0.39092)	$70366
Present value of (180000*6%)= 10800 for 9 years @11% annually (10800*5.53705)	59800
Present value of Notes payable of Equipment	$130166

0.39092, is the Present value of $1 in 9 years @ 11%

5.53705, is the Present value of ordinary annuity for 9 years @ 11%