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

Question

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

1. Purchases land having a fair value of $327,000 by issuing a 4-year, zero- interest bearing promissory note in the face amount of $478,761.

2. Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $592,000. (interest payable annually)

The company has to pay 10% 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 te first year on both ntoes using the effective-interest method.

THIS IS WHAT I HAVE SO FAR. PLEASE HELP ME FIGURE THE OTHER JOURNAL ENTRIES!!!

A. 1. Land- $327,000 DEBIT

         Discount Notes Payable $151,761 DEBIT

                  Notes Payable $478,761 CREDIT

      2. ___________        $___________

          ___________         $___________

          ___________         $___________

B. 1. Interest Expense $32,700 DEBIT

                Dicount Notes Payable $32,700 CREDIT

     2. ____________        $___________

         ____________         $___________

         ____________         $___________

(If I have eithor of the two journal entries I did wrong, please let me know. I appreciate any and all help with these journal entries and calculations) Thank you!

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

2)

Equipment Dr. 404206

Discount on Notes Payable Dr. 187794

Notes Payable Cr. 592000

Part B:

2)

Interest Expense Dr. 22661

Discount on Notes Payable (187794*.10) Cr. 18779

Cash Cr. (592000*.07) 41440

Notes:

Calculation of Discount for Part A (2)

Present Value of 592000 due in 8 Years = 592000*PVIF(10%,8 Years) = 592000*.4665 = 276168

Add Present Value of Annual Payment of 41440 for 8 Years = 24000*PVIFA(10%,8Years) = 24000*5.3349 = 128037.60 or 128038

Total Value = 276168 + 128038 = 404206

Discount = Maturity Value - Total Value = 592000 - 404206 = 187794

Thanks.

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