Question

Fixed Asset Purchases with Note

On June 30, Collins Management Company purchased land for $240,000 and a building for $360,000, paying $300,000 cash and issuing a 9% note for the balance, secured by a mortgage on the property. The terms of the note provide for 20 semiannual payments of $15,000 on the principal plus the interest accrued from the date of the preceding payment.

If an amount box does not require an entry, leave it blank.

a. Journalize the entry to record the transaction on June 30.

June 30	Building
	Land
	Notes Payable
	Cash

Feedback

Determine what the company is acquiring and how they are paying for this purchase.

Learning Objective 1.

b. Journalize the entry to record the payment of the first installment on December 31.

Dec. 31	Notes Payable
	Interest Expense
	Cash

Feedback

Pay attention to dates and remember that all interest rates are expressed in annual terms. What affect will this installment payment have on the amount owed?

Learning Objective 1.

c. Journalize the entry to record the payment of the second installment the following June 30.

June 30	Notes Payable
	Interest Expense
	Cash

Answer 1

Date	Accounts title	Debit	Credit
Journalize the entry record the transaction on June 30.	Land	$240,000
	Building	$360,000
	Cash		$300,000
	Notes Payable ($240,000 + 360,000- 300,000 )		$300,000
	(to record purchases)
Journalize the entry to record the payment of the first installment on December 31.	Interest Expense ($300,000x 9% x 6/12)	$13,500
	Notes Payable	$15,000
	Cash ($13,500+ 15,000 )		$28,500
	(to record first instalment)
Journalize the entry to record the payment of the second installment the following June 30	Interest Expense [($300,000- 15000) x 9% x 6/12] = 285,000x 9% x 6/12]	$12,825
	Notes Payable	$15,000
	Cash ($12,825+ 15,000)		$27,825
	(to record second instalment)

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