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Chapter 14: 16E (page 757)

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

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)337,012.
  2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

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

Instructions

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

Short Answer

Expert verified
  1. The discount on notes payable is $64,325.70.
  2. Interest expense is $20,424.17.

Step by step solution

01

Meaning of Promissory Note

A composed guarantee to pay cash to a particular individual or to the carrier at a particular or predetermined future time is known as a promissory note.

02

(a) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Jan. 1, 2017 (1)

Land

200,000.00

Discount on Notes Payable

137,012.00

Notes Payable

337,012.00

(2)

Equipment

185,674.30

Discount on Notes payable

64,325.70

Notes payable

250,000.00

Notes payable on January 1, 2017: The $200,000 capitalized land cost represents the present value of the note discounted for five years at 11%.

Working notes:

Computation of the discount on notes payable:

Maturity value

$250,000

Present value of $250,000 due in 8 years at 11%

($250,000脳0.43393) $108,482.50

Present value of $15,000 payable annually

for 8 years at 11% annually ($15,000脳5.14612) 77,191.80

Present value of the note

(185,674.30)

Discount

$64,325.70

03

(b) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

1

Interest expense($200,000脳0.11)

22,000

Discount on Notes Payable

22,000

2

Interest expense ($185,674.30脳0.11)

20,424.17

Discount on notes payable

5,424.17

Cash ($250,000脳0.06)

15,000.00

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Most popular questions from this chapter

(Long-Term Debt Disclosure) At December 31, 2017, Redmond Company has outstanding three long-term debt issues. The first is a \(2,000,000 note payable which matures June 30, 2020. The second is a \)6,000,000 bond issue that matures September 30, 2021. The third is a \(12,500,000 sinking fund debenture with annual sinking fund payments of \)2,500,000 in each of the years 2019 through 2023.

Instructions

Prepare the required note disclosure for the long-term debt at December 31, 2017.

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company鈥檚 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Good-Deal Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low down payment and low car payments for the first year after purchase. It believes that this promotion will bring in some new buyers.

On January 1, 2017, a customer purchased a new \(33,000 automobile, making a down payment of \)1,000. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a $400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2018. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2020.

Instructions

(a) Prepare a note amortization schedule for the first year.

(b) Indicate the amount the customer owes on the contract at the end of the first year.

(c) Compute the amount of the new quarterly payments.

(d) Prepare a note amortization schedule for these new payments for the next 2 years.

(e) What do you think of the new sales promotion used by Good-Deal?

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a 鈥渄ebtor in possession,鈥� he has negotiated the following revised loan agreement with United Bank. Perkins Inc.鈥檚 \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

On January 1, Patterson Inc. issued \(5,000,000, 9% bonds for \)4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a) \(4,725,500. (c) \)258,050.

(b) \(4,714,500. (d) \)4,745,000
See all solutions

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