Question

At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

1. The company issued a two-year, 12%, $600,000 note in exchange for a tract of land. The current market rate of interest is 12%.
2. Lambert acquired some office equipment with a fair value of $94,643 by issuing a one-year, $100,000 note. The stated interest on the note is 6%. The current market rate of interest is 12%.
3. The company purchased a building by issuing a three-year installment note. The note is to be repaid in equal installments of $1 million per year beginning one year hence. The current market rate of interest is 12%.

Required:
Prepare the journal entries to record each of the three transactions and the interest expense at the end of the first year for each. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.)

Answer 1

Prepare journal entries as follows:

Trn.	Account Titles	Debit	Credit
A	Land	$600,000
	Notes payable		$600,000
	Interest Expense [$600,000 × 12%]	$72,000
	Cash		$72,000
B	Office Equipment	$94,643
	Discount on notes payable	$5,357
	Notes payable		$100,000
	Interest Expense	$11,357
	Discount on notes payable		$5,357
	Cash [$100,000 × 6%]		$6,000
	Notes payable	$100,000
	Cash		$100,000
C	Building	$2,401,830
	Notes payable [PVAD(12%, 3) × 1 million]		$2,401,830
	[2.40183 × $1000000]
	Interest Expense	$288,220
	Notes payable	$711,780
	Cash		$1,000,000

Working notes as follows:

PVA(12%, 3 years) = 0.711780

Notes payable [$1000000   0.711780] = $711,780

Compute Interest Expense:

$1000000 12% = $120,000

PVAD(12%, 3 years) = 2.40183

Interest Expense = $120,0000 2.40183 = $288220