Question

On January 1, 2017, Marigold Company makes the two following acquisitions.

1.		Purchases land having a fair value of $240,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $404,414.
2.		Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $390,000 (interest payable annually on January 1).

The company has to pay 11% interest for funds from its bank.

		(a) Record the two journal entries that should be recorded by Marigold Company for the two purchases on January 1, 2017.
(b)		(b) Record the interest at the end of the first year on both notes using the effective-interest method (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) 1/1/17 account title and explanation debit credit 1/1/17 account title and explanation debit credit (b) 12/31/17 account title and explanation debit credit 12/31/17 account title and explanation debit credit

Answer 1

Ref	Account	Debit	Credit
a	Land	2,40,000
	Discount on note payable	1,64,414
	Note payable		4,04,414
	Equipment	2,82,028
	Discount on note payable	1,07,972
	Note payable		3,90,000

Workings for discount on note payable for second transaction:

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (11%,9 periods)	23,400.0	5.5370	1,29,566.91
	Principle payments -Present value (11%,9 periods)	3,90,000	0.3909	1,52,460.66
A	price			2,82,028
	Face value			3,90,000
	Premium/(Discount)			-1,07,972
	Interest amount:
	Face value	3,90,000
	Coupon/stated Rate of interest	6.00%
	Frequency of payment(once in)	12 months
B	Interest amount	390000*0.06*12/12=		23400
	Present value calculation:
	yield to maturity/Effective rate	11.00%
	Effective interest per period(i)	0.11*12/12=		11.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	1
b	Years to maturiy	9
c=a*b	Number of periods	9

Ref	Account	Debit	Credit
b	Interest expense	26,400		=240000*11%
	Discount on note payable		26,400

Interest expense	31,023
Discount on note payable		7,623
Intererst payable		23,400

Amortisation schedule for second Note:

Period		Opening balance-Liability	Opening balance-Discount	Interest expense	Cash interest	Unamortised discount credit	Book value of bonds	Closing balance-Discount
		A	B	C= A* 11.00%	D	E=C-D	F=A+E	G=B-E
Dec.31	2017	2,82,028	1,07,972	31,023	23,400	7,623	2,89,651	1,00,349