On January 1, 2017, Ayayai Company makes the two following acquisitions. 1. Purc
ID: 2534219 • Letter: O
Question
On January 1, 2017, Ayayai Company makes the two following acquisitions.
1. Purchases land having a fair value of $330,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $483,153.
2. Purchases equipment by issuing a 6%, 9-year promissory note having a maturity value of $380,000 (interest payable annually on January 1).
The company has to pay 10% interest for funds from its bank.
(a) Record the two journal entries that should be recorded by Ayayai 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.
Please show all work (step by step would be awesome)
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, 2017Explanation / Answer
Solution:
Fair value of 1st equipment = $330,000
Effective rate of interest = 10%
Fair value of 2nd equipment = Present value of interest and maturity discounted at 10%
Now
Fair value of equipment = ( $380,000* 6%) * Cumulative PV factor at 10% for 9 periods + $380,000 * PV factor at 10% for 9th period
= $22,800 * 5.759024 + $380,000 * 0.424098
X = $292,463
Journal Entries - Ayayai Company No Date Particulars Debit Credit a1 1-Jan-17 Equipment Dr $330,000.00 Discount on note payable Dr $153,153.00 To Note Payable $483,153.00 (Being equipment purchased by issuing zero interest bearing promissory note) a2 1-Jan-17 Equipment Dr $292,463.00 Discount on note payable Dr $87,537.00 To Note Payable $380,000.00 (Being equipment purchased by issuing note) b1 31-Dec-17 Interest Expense Dr $33,000.00 To Discount on note payable $33,000.00 (Being interest expense recorded and discount amortized) b2 31-Dec-17 Interest Expense Dr ($292,463*6%) $29,246.00 To Discount on note payable $6,446.00 To Cash ($380,000*6%) $22,800.00 (Being interest paid and discount amortized)