Question

QUESTION 2.4

On June 1, 2017, Niffler Corporation approached Bowtruckle Corporation about buying a parcel of undeveloped land. Bowtruckle was asking $240,000 for the land and Niffler saw that there was some flexibility in the asking price. Niffler did not have enough money to make a cash offer to Bowtruckle and proposed to give, in return for the land, a $300,000, five-year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to Bowtruckle Corporation on June 1 of each of the next five years. Bowtruckle insisted that the note taken in return become a mortgage note. Bowtruckle accepted the amended offer, and Niffler signed a mortgage note for $300,000 due June 1, 2022. Niffler would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. Bowtruckle, on the other hand, could borrow the funds at 9%. Both Niffler and Bowtruckle have December 31st year ends.

Required:

1) What is the difference between a promissory note payable and a mortgage note payable? Why would Bowtruckle Corporation insist on obtaining a mortgage note payable from Niffler Corporation?

2) Calculate the purchase price of the land.

3) Prepare the journal entry for the purchase of the land.

4) Prepare any adjusting journal entry that is required at the end of the fiscal year and

the first payment made on June 1, 2018, assuming no reversing entries are used.

5) Assume that Bowtruckle had insisted on obtaining an instalment note from Niffler

instead of a mortgage note. Then do the following:

a. Calculate the amount of the instalment payments that would be required for a

five-year instalment note. Use the same cost of the land to Niffler Corporation

that you deter- mined for the mortgage note in part (a).

b. Prepare the journal entry for the purchase of the land and the issuance of the

instalment note.

c. Prepare any adjusting journal entry that is required at the end of the fiscal year

and the first payment made on June 1, 2018, assuming no reversing entries are

used.

d. Compare the balances of the two different notes payable and related accounts

at December 31, 2017. Be specific about the classifications on the statement of financial position.

Answer 1

Answers.

1. With a promissory note, you promise to make periodic payments to repay the amount you’ve borrowed. With a mortgage, you give the lender a way to get its money back if you don’t keep your promise to make those payments.The purpose of the mortgage is to provide security for the loan that is evidenced by a promissory note. Lender is more secure if he hold the mortgage. That's why Bowtruckle Corporation insist on obtaining a mortgage note payable from Niffler Corporation.

Answer 2.

Purchase price = mortgage payable + Interest @ 4 % for 5 yrs. ( 300000+ 31498 )

Interest calculation given below:

Begining Bal. Interest. Principal balan

1	$300,000.00	$10,993.37	$55,306.15	$244,693.89
2	$244,693.89	$8,740.11	$57,559.41	$187,134.52
3	$187,134.52	$6,395.06	$59,904.46	$127,230.09
4	$127,230.09	$3,954.46	$62,345.06	$64,885.06
5	$64,885.06	$1,414.42	$64,885.10	$0.00

Answer 3.

Land account. Dr. 300000

Mortgage payable. Cr 300000