Question

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

1.		Purchases land having a fair value of $160,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $251,763.
2.		Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $270,000 (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 Blossom 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.

A) 1.

Jan 1 2020	ACC.	Dr	CR

2.

Jan 1 2020	acc	DR	CR

B) 1.

Dec 31 2020	acc	Dr	Cr

2.

Dec 31 2020	acc	DR	CR

Answer 1

Answer:

Journal Entries and Interest Expense:-

Date	Particulars	Amount ($)	Amount ($)
Jan 1 2020	Land A/c Dr.	160000
	Discount on Notes Payable Dr.	91763
	To Notes Payable		251763
Jan 1 2020	Interest Expense A/c Dr (160000 * 12%)	19200
	To Discount on Notes Payable		19200
Dec 31 2020	Equipment A/c Dr	202941
	Discount on Notes Payable Dr	67059
	To Notes Payable		270000
Dec 31 2020	Interest Expense A/c Dr (202941*12%)	$24353
	To Discount on Notes Payable		$5453
	To Cash		$18900

Calculation Of Present Value of Equipment A/c:-

Face Value * PVIF (12%, 8 years)

= $270,000 * 0.4039

= $109053 (a)

Interest * PVIFA (12%, 8 years)

=$18900 * 4.96764

= $93888 (b)

Therefore, Present Value of Equipment= $202941 (a+b)