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.

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

Maturity value

$250,000

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

$\left(\$250,000\times 0.43393\right)$ $108,482.50

Present value of $15,000 payable annually

for 8 years at 11% annually $\left(\$15,000\times 5.14612\right)$ 77,191.80

Present value of the note

(185,674.30)

Discount

$64,325.70

Date

Particulars

Debit ($)

Credit ($)

1

Interest expense$\left(\$200,000\times 0.11\right)$

22,000

Discount on Notes Payable

22,000

2

Interest expense $\left(\$185,674.30\times 0.11\right)$

20,424.17

Discount on notes payable

5,424.17

Cash $\left(\$250,000\times 0.06\right)$

15,000.00