On January 1, 2017, Flounder Company makes the two following acquisitions. 1. Pu
ID: 2529194 • Letter: O
Question
On January 1, 2017, Flounder Company makes the two following acquisitions. 1. Purchases land having a fair value of $280,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $471,816. 2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $460,000 (interest payable annually on January 1). The company has to pay 11% interest for funds from its bank. (a) Record the two journal entries that should be recorded by Flounder Company for the two purchases on January 1, 2017 (b) Record the interest at the end of the first year on both notes using the effective-interest methodExplanation / Answer
Required journal entries are as prepared below:
Working:
Year Particulars L.F Debit ($) Credit ($) 2017 (a) 1. Jan 1 Land 2,80,000 Discount on Notes Payable 1,91,816 Notes Payable 4,71,816 (for land acquired in exchange for promissory note) 2. Jan 1 Equipment 3,41,639 Discount on Notes Payable 1,18,361 Notes Payable 4,60,000 (for equipment acquired in exchange for promissory note) (b) 1. Dec 31 Interest Expense (280,000*.11) 30,800 Discount on Notes payable 30,800 (For discount amortized) 2. Dec 31 Interest Expense (341,639*.11) 37,580 Discount on Notes payable 9,980 Cash (460,000*6%) 27,600 (For discount amortized)