/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} 16E On January 1, 2017, Ellen Carter... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

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

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in a troubled-debt restructuring involving a modification of terms?

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

  1. expensed in the period when the debt is issued.
  2. recorded as a reduction in the carrying value of bonds payable.
  3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

On January 1, 2017, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer鈥檚 inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.

Instructions


(a) Prepare the journal entry to record the initial transaction on January 1, 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entry to record any adjusting entries needed at December 31, 2017. Assume that the sales of Avery鈥檚 product to this customer occur evenly over the 3-year period.

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

Strickland Company owes \(200,000 plus \)18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2017, Strickland鈥檚 business deteriorated due to a faltering regional economy. On December 31, 2017, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of \(390,000, accumulated depreciation of \)221,000, and a fair value of \(180,000.

Instructions

  1. Prepare journal entries for Strickland Company and Moran State Bank to record this debt settlement.
  2. How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2017 income statement?
  3. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock (\)10 par) which has a fair value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland鈥檚 stock as a trading investment, prepare the entries to record the transaction for both parties.
See all solutions

Recommended explanations on Business Studies Textbooks

Business Case Studies

Read Explanation

Actuarial Science in Business

Read Explanation

Influences On Business

Read Explanation

Public Relations Business Studies

Read Explanation

Strategy

Read Explanation

Business Data Analytics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.