Question

II. Notes Payable. Rubio Company had the following borrowing activity. Rubio has a borrowing rate of 6 percent on its other debt.

A. On June 30, 2016, Rubio issued a non-interest bearing, 10 year note of $50,000 to acquire land for expansion.

1. Calculate the cash equivalent price of the land (assuming 6% is the market rate).

2. Prepare the journal entry to record the acquisition on June 30.

B. On January 1, 2016, Rubio acquired equipment by issuing an $80,000, 2 percent (low-interest bearing), 5 year note, with interest paid annually, starting December 31, 2016.

1. Calculate the cash equivalent price of the equipment (assuming 6% is the market rate).

2. Prepare the journal entry to record the acquisition on January 1.

3. Prepare the journal entry to record the interest payment on December 31, 2016, assuming the effective interest method.

Answer 1

Solution A:

Cash equivalent price of land = Present value of note discounted at 6% market rate

= $50,000 * PV Factor at 6% for 10th period = $50,000 * 0.558395

= $27,920

Journal Entries - Rubio
Date	Particulars	Debit	Credit
30-Jun	Land Dr	$27,920.00
	Discount on notes payable Dr	$22,080.00
	To Note Payable		$50,000.00
	(To record purchase of land by issuing zero interest bearing note)

Solution B:

Cash equivalent price of equipment = Present value of interest and note discounted at market rate of interest

= ($80,000 * 2%) * cumulative PV Factor at 6% for 5 periods + $80,000 * PV Factor at 6% for 5th period

= $1,600 * 4.212364 + $80,000 * 0.747258

= $66,520

Journal Entries - Rubio
Date	Particulars	Debit	Credit
1-Jan-16	Equipment Dr	$66,520.00
	Discount on notes payable Dr	$13,480.00
	To Note Payable		$80,000.00
	(To record purchase of equipment by issuing note)
31-Dec-16	Interest expense Dr ($66,520 * 6%)	$3,991.00
	To Cash		$1,600.00
	To Discount on notes payable		$2,391.00
	(To record interest expense on note and discount amortization)