Question

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

1.		Purchases land having a fair value of $290,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $467,048.
2.		Purchases equipment by issuing a 7%, 9-year promissory note having a maturity value of $450,000 (interest payable annually).

The company has to pay 10% interest for funds from its bank.

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

Answer 1

A. Record the two journal entries that should be recorded by Culver Company for the two purchases on January 1, 2020.

1.

Date	Account Titles and Explanation	Debit	Credit
January 1, 2020	Land	$290000
	Discount on notes payable	$177048
	Notes payable		$467048
	(To record purchase of land by issuing note payable)

PV of $467048 discounted at 10% =467048 /(1.10)^5 = $ 290000

2.

Computation of the discount on notes payable:

Maturity value $450000

Present value of $450000 due in 9 years at 10% = $450000 * 0.4241 = $ 190845

Present value of $31500 ( 450000 * 7% ) payable annually for 9 years at 10% annually—$31500 * 5.75902 = $181409

Present value of the note = $ 190845 + $ 181409 = $372254

Discount = $450000 - $372254 = $77746

.

Date	Account Titles and Explanation	Debit	Credit
January 1, 2020	Equipment	$372254
	Discount on notes payable	$77746
	Notes payable		$450000
	(To record purchase of equipment by issuing note payable)

.

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

1.

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020	Interest expense ($290000*10%)	$29000
	Discount on notes payable		$29000
	(To record the interest expense recorded and discount amortized)

2.

Date	Account Titles and Explanation	Debit	Credit
December 31, 2020	Interest expense ($372254  * 10%)	$37225
	Discount on notes payable		$5725
	Interest Payable ( $450000 * 7%)		$31500
	(To record the interest expense recorded)