On January 1, 2014, Ellen Greene Company makes the two following acquisitions. 1
ID: 2714531 • Letter: O
Question
On January 1, 2014, Ellen Greene Company makes the two following acquisitions.
1. Purchases land having a fair value of $286,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $481,927.
2. Purchases equipment by issuing a 7%, 9-year promissory note having a maturity value of $382,000. (interest payable annually).
The company has to pay 11% interest for funds from its bank.
(a) Record the two journal entries that should be recorded by Ellen Greene Company for the two purchases on January 1, 2014.
(b) Record the interest at the end of the first year on both notes using the effective-interest method.
Explanation / Answer
Journal Entries
On 1st Jan 2014
1. Land A/c Dr. $286000
Profit and loss A/c Dr. $195927
To Zero rated Promissory note $481927
2. Equipment A/c Dr. $382000
To 7% promissory note $382000
Interest on Notes
Interest= $382000*7%= $26740
There will not be any interest n zero rate bond.
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