Question

Exercise 14-16 On January 1, 2017, Larkspur Company makes the two following acquisitions. 1. Purchases land having a fair value of $290,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $488,667. 2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $330,000 (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 Larkspur Company for the two purchases on January 1, 2017. (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.) No. Date Account Titles and Explanation Debit Credit (a) 1. January 1, 2017 2. January 1, 2017 (b) 1. December 31, 2017 2. December 31, 2017

Answer 1

Solution a:

Fair value of equipment = Present value of interest and maturity value discounted at 11%

= ($330,000*6%) * Cumulative PV Factor at 11% for 8 periods + $330,000 * PV Factor at 11% for 8th period

=$19,800 * 5.14612 + $330,000 * 0.43393 = $101,893 + $143,197 = $245,090

Journal Entries - Larkspur INC.
Event	Date	Particulars	Debit	Credit
a1	1-Jan-17	Land Dr	$290,000.00
		Discount on notes payable Dr	$198,667.00
		To Notes Payable		$488,667.00
		(To record purchase of land by issue of note)
a2	1-Jan-17	Equipment Dr	$245,090.00
		Discount on notes payable Dr	$84,910.00
		To Notes Payable		$330,000.00
		(To record purchase of equipment by issue of note)

Solution b:

Journal Entries - Larkspur INC.
Event	Date	Particulars	Debit	Credit
b1	31-Dec-17	Interest expense Dr	$31,900.00
		To Discount on Notes Payable		$31,900.00
		(To record interest expense)
b2	31-Dec-17	Interest expense Dr	$26,960.00
		To Discount on Notes Payable		$7,160.00
		To Interest Payable		$19,800.00
		(To record interest expense)