Question

On June 1, 2017, ABC Corporation approached 123 Corporation about buying a parcel of undeveloped land. 123 Corp was asking $240,000 for the land and ABC saw that there was some flexibility in the asking price. ABC did not have enough money to make a cash offer to 123 Corp 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 123 Corp Corporation on June 1 of each of the next five years. 123 Corp insisted that the note taken in return become a mortgage note. 123 Corp accepted the amended offer, and ABC Corp signed a mortgage note for $300,000 due June 1, 2022. ABC would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. 123 Corp, on the other hand, could borrow the funds at 9%. Both ABC Corp and 123 Corp have December 31st year ends.

1) Assume that 123 Corp had insisted on obtaining an instalment note from ABC Corp instead of a mortgage note. Calculate the purchase price of the land. Then do the following:

a) Calculate the amount of the instalment payments that would be required for a five-year instalment note.

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.

Answer 1

1. If 123 corp had insisted on obtaining an installment note from ABC corp instead of mortgage note, Then purchase price of land is = $ 2,40,000.

1. Loan amount        =     $ 2,40,000

Loan term= 5 years

Interest rate=10% P.A. (it is assumed that interest rate for installment note is 10% which same as bank interest rate)

Total interest payable = $ 65,957.44 (working note -1 )

Installment amount = ($ 2,40,000 + $ 65,957.44) / 5 = $ 5099.29

1.                                                       Journal Entry

Particulars	Debit	Credit
Land A/C Dr Interest A/C Dr To installment note A/c ( Being land purchased by issuing installment note)	$2,40,000 $ 65,957	$ 3,05,957

                                                                                                Working Note

Payment Date	Payment	Principal	Interest	Total Interest	Balance
May 2018	$5,099.29	$3,099.29	$2,000.00	$2,000.00	$236,900.71
Jun 2018	$5,099.29	$3,125.12	$1,974.17	$3,974.17	$233,775.59
Jul 2018	$5,099.29	$3,151.16	$1,948.13	$5,922.30	$230,624.43
Aug 2018	$5,099.29	$3,177.42	$1,921.87	$7,844.17	$227,447.01
Sep 2018	$5,099.29	$3,203.90	$1,895.39	$9,739.56	$224,243.11
Oct 2018	$5,099.29	$3,230.60	$1,868.69	$11,608.26	$221,012.51
Nov 2018	$5,099.29	$3,257.52	$1,841.77	$13,450.03	$217,754.99
Dec 2018	$5,099.29	$3,284.67	$1,814.62	$15,264.65	$214,470.33
Jan 2019	$5,099.29	$3,312.04	$1,787.25	$17,051.91	$211,158.29
Feb 2019	$5,099.29	$3,339.64	$1,759.65	$18,811.56	$207,818.65
Mar 2019	$5,099.29	$3,367.47	$1,731.82	$20,543.38	$204,451.18
Apr 2019	$5,099.29	$3,395.53	$1,703.76	$22,247.14	$201,055.65
May 2019	$5,099.29	$3,423.83	$1,675.46	$23,922.60	$197,631.82
Jun 2019	$5,099.29	$3,452.36	$1,646.93	$25,569.54	$194,179.47
Jul 2019	$5,099.29	$3,481.13	$1,618.16	$27,187.70	$190,698.34
Aug 2019	$5,099.29	$3,510.14	$1,589.15	$28,776.85	$187,188.20
Sep 2019	$5,099.29	$3,539.39	$1,559.90	$30,336.75	$183,648.81
Oct 2019	$5,099.29	$3,568.88	$1,530.41	$31,867.16	$180,079.93
Nov 2019	$5,099.29	$3,598.62	$1,500.67	$33,367.83	$176,481.30
Dec 2019	$5,099.29	$3,628.61	$1,470.68	$34,838.50	$172,852.69
Jan 2020	$5,099.29	$3,658.85	$1,440.44	$36,278.94	$169,193.84
Feb 2020	$5,099.29	$3,689.34	$1,409.95	$37,688.89	$165,504.49
Mar 2020	$5,099.29	$3,720.09	$1,379.20	$39,068.09	$161,784.41
Apr 2020	$5,099.29	$3,751.09	$1,348.20	$40,416.30	$158,033.32
May 2020	$5,099.29	$3,782.35	$1,316.94	$41,733.24	$154,250.97
Jun 2020	$5,099.29	$3,813.87	$1,285.42	$43,018.67	$150,437.11
Jul 2020	$5,099.29	$3,845.65	$1,253.64	$44,272.31	$146,591.46
Aug 2020	$5,099.29	$3,877.70	$1,221.60	$45,493.91	$142,713.76
Sep 2020	$5,099.29	$3,910.01	$1,189.28	$46,683.19	$138,803.76
Oct 2020	$5,099.29	$3,942.59	$1,156.70	$47,839.88	$134,861.16
Nov 2020	$5,099.29	$3,975.45	$1,123.84	$48,963.73	$130,885.71
Dec 2020	$5,099.29	$4,008.58	$1,090.71	$50,054.44	$126,877.14
Jan 2021	$5,099.29	$4,041.98	$1,057.31	$51,111.75	$122,835.16
Feb 2021	$5,099.29	$4,075.66	$1,023.63	$52,135.38	$118,759.49
Mar 2021	$5,099.29	$4,109.63	$989.66	$53,125.04	$114,649.86
Apr 2021	$5,099.29	$4,143.88	$955.42	$54,080.46	$110,505.99
May 2021	$5,099.29	$4,178.41	$920.88	$55,001.34	$106,327.58
Jun 2021	$5,099.29	$4,213.23	$886.06	$55,887.40	$102,114.35
Jul 2021	$5,099.29	$4,248.34	$850.95	$56,738.35	$97,866.02
Aug 2021	$5,099.29	$4,283.74	$815.55	$57,553.90	$93,582.28
Sep 2021	$5,099.29	$4,319.44	$779.85	$58,333.76	$89,262.84
Oct 2021	$5,099.29	$4,355.43	$743.86	$59,077.61	$84,907.40
Nov 2021	$5,099.29	$4,391.73	$707.56	$59,785.18	$80,515.67
Dec 2021	$5,099.29	$4,428.33	$670.96	$60,456.14	$76,087.35
Jan 2022	$5,099.29	$4,465.23	$634.06	$61,090.20	$71,622.12
Feb 2022	$5,099.29	$4,502.44	$596.85	$61,687.05	$67,119.68
Mar 2022	$5,099.29	$4,539.96	$559.33	$62,246.38	$62,579.72
Apr 2022	$5,099.29	$4,577.79	$521.50	$62,767.88	$58,001.93
May 2022	$5,099.29	$4,615.94	$483.35	$63,251.23	$53,385.98
Jun 2022	$5,099.29	$4,654.41	$444.88	$63,696.11	$48,731.58
Jul 2022	$5,099.29	$4,693.19	$406.10	$64,102.21	$44,038.38
Aug 2022	$5,099.29	$4,732.30	$366.99	$64,469.20	$39,306.08
Sep 2022	$5,099.29	$4,771.74	$327.55	$64,796.75	$34,534.34
Oct 2022	$5,099.29	$4,811.50	$287.79	$65,084.53	$29,722.83
Nov 2022	$5,099.29	$4,851.60	$247.69	$65,332.22	$24,871.23
Dec 2022	$5,099.29	$4,892.03	$207.26	$65,539.48	$19,979.20
Jan 2023	$5,099.29	$4,932.80	$166.49	$65,705.98	$15,046.41
Feb 2023	$5,099.29	$4,973.90	$125.39	$65,831.36	$10,072.50
Mar 2023	$5,099.29	$5,015.35	$83.94	$65,915.30	$5,057.15
Apr 2023	$5,099.29	$5,057.15	$42.14	$65,957.44	$0.00