On January 1, 2013, McLean Company makes the two following acquisitions. 1.Purch

Question

On January 1, 2013, McLean Company makes the two following acquisitions. 1.Purchases land having a fair value of $377,000 by issuing a 4-year, zero-interest-bearing promissory note in the face amount of $593,217. 2.Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $410,000. (interest payable annually). The company has to pay 12% interest for funds from its bank. (a)Record the two journal entries that should be recorded by McLean Company for the two purchases on January 1, 2013. (b)Record the interest at the end of the first year on both notes using the effective-interest method.

Explanation / Answer

a) .................................... debit.........................credit promising note...................................................593217 land(fixed asset).....................593217 promising note...................................................410000 equipment...........................410000 b) interest on first note = 0 on second = .12*410000 = 49200

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