Question

Notes for Journal Entries:

1) Kuechly uses periodic inventory system and LIFO

2) All credit sales discounts are recorded using the net method – customers receive a 3 percent discount if they pay within 30 days.

3) Purchase discounts are recorded using the net method

4) All depreciation is straight line.

5) 2020 is first year of operation.

June 30 2020 -  Purchased land and a building.  A $200,000 cash down payment was required and a $800,000 note was accepted by the seller for the balance (12 percent interest payable each year on June 30). The fair value of the land at the date of purchase was deemed to be 300,000 and the fair value of the building was 900,000. The building has an estimated residual value of $0 and a useful life of 30 years.

October 1 2020 - Purchased equipment for in exchange for a $30,000 non-interest bearing note due in one year. The equipment has an estimated residual value of $2,000 and a useful life of 8 years. Note: Assume an effective interest rate of 8 percent.

What Adjusting Journal Entries should be made at 12/31/2020

Answer 1

NOtes

1) When a company buys land and other assets for a lump sum. When land and buildings purchased together are to be used, the firm divides the total cost and establishes separate ledger accounts for land and for buildings. This division of cost establishes the proper balances in the appropriate accounts. This is especially important later because the depreciation recorded on the buildings affects reported income, while no depreciation is taken on the land.

in the above case, the total cost is allocated based on the proportion of market value i.e (3:9) or (1:3)

Cost = 200000+800000

= 1000000

Land = 1000000*1/4 = 250000

Building = 100000*3/4 = 750000

2)

a non-interest bearing note or zero interest note, does not have an interest rate and does not charge periodic interest payments on the outstanding liability. In order for the lender to get a return on their zero interest notes payable, the notes are issued at a lower price than their face value.

The discount on notes payable account is a balance sheet contra liability account, as it is netted off against the notes payable account to show the net liability.

Each month a portion of the discount on the notes payable is amortized as an interest expense

Value of equipment = Present value of Note payable

Notes payable face value = $30000

Discounting Factor = (1+0.08)

= 1.08

The present value of Notes payable = 30000/1.08

= 27778 ( rounded off)

3)

Total depreciation = (1) +(2)

= 806+12500

= 13306

4) Calculation of accrued Interest

= Note payable @ 12% long term

Value = $ 800000

Interest For 6 Month = 800000*12%*6/12

= $ 48000

5) Non-Interest Note @ 8%

Each month a portion of the discount on the notes payable is amortized as an interest expense

cash value = 27778 ..........As calculated in note 1

Interest for 3 month = 27778 * 8% *3/12

= $ 506................2 (rounded off)

Interest expense = 506