Question

Exercise 14-6 On January 1, 2020, Culver Corporation acquired the following properties: 1. Investment property consisting of land and an apartment building in Toronto for $1.5 million. To finance this transaction, Culver Corporation issued a five-year interest-free promissory note to repay $2,307,941 on January 1, 2025. 2. Vacant land in Rome, Italy for $5 million. To finance this transaction, Culver Corporation obtained a 6% mortgage for the full purchase price, secured by the land, with a maturity date of January 1, 2030. Interest is payable annually. If Culver Corporation borrowed this money from the bank, the company would need to pay 9% interest. Click here to view the factor table PRESENT VALUE OF 1. Click here to view the factor table PRESENT VALUE OF AN ANNUITY OF 1. Using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, calculate the value of the mortgage. Using the calculation from the tables, record Culver Corporation’s journal entries on January 1, 2020, for each of the purchases. (Hint: Refer to Chapter 3 for tips on calculating.) (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round final answer to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Date Account Titles and Explanation Debit Credit Jan. 1, 2020     No Entry    Investment Property    Interest Expense    Notes Payable    Mortgage Payable    Land    Cash         Investment Property    Notes Payable    Mortgage Payable    Land    Cash    No Entry    Interest Expense     (To record purchase of land and building) Jan. 1, 2020     Land    Cash    No Entry    Interest Expense    Investment Property    Notes Payable    Mortgage Payable         Land    No Entry    Mortgage Payable    Cash    Interest Expense    Investment Property    Notes Payable     (To record purchase of land) Record the interest at the end of the first year on both instruments using the effective interest method. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit     Investment Property    Cash    Interest Expense    Mortgage Payable    Land    No Entry    Notes Payable         Investment Property    Land    Notes Payable    Mortgage Payable    No Entry    Interest Expense    Cash     (To record interest on five-year note)     No Entry    Land    Mortgage Payable    Investment Property    Notes Payable    Interest Expense    Cash         Mortgage Payable    Land    No Entry    Notes Payable    Interest Expense    Cash    Investment Property         Interest Expense    Mortgage Payable    Land    No Entry    Cash    Notes Payable    Investment Property     (To record interest on ten-year mortgage) Question Attempts: 0 of 5 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

a.

January 1, 2020

1.

Investment Property....................................................

1,500,000

Notes Payable...................................................

1,500,000

(The $1,500,000 capitalized cost

represents the present value of the

note with maturity amount of $2,307,941

discounted for five years at 9%)

2.

Land.............................................................................

1614939

Mortgage Payable.............................................

1614939

1. Using tables:    Present value of $2,000,000 due in

10 years at 9%—$2,000,000

X .42241

$844,820

Present value of $120,000 ($2,000,000 X 6%)

payable annually for 10 years

at 9% annually—$120,000

X 6.41766

770,119

Present value of the note

$1,614,939

Discount to be amortized(2000000-1614939)

$ 385,061

2. Using a financial calculator: - for the principal

PV	$ ?	Yields $1,614,939
I	9%
N	10
PMT	$(120,000)
FV	$ (2,000,000)
Type	0

1.	Interest Expense ($1,500,000 X .09)..	135,000
	Notes Payable..............................		135,000
2.	Interest Expense ($1,614,939X .09)..	145,344.51
	Mortgage Payable.......................		25,344.51
	Cash ($2,000,000 X .06).............		120,000