On January 1 2017 Pharoah Company makes the two following ac

On January 1, 2017, Pharoah Company makes the two following acquisitions 1. Purchases land having a fair value of $160,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $257,682. 2. Purchases equipment by issuing a 796, 8-year promissory note having a maturity value of $230,000 (interest payable annually on January 1) The company has to pay 10% interest for funds from its bank. (a) Record the two journal entries that should be recorded by Pharoah Company for the two purchases on January 1, 2017. (b) Record the interest at the end of the first year on both notes using the effective-interest method

Solution

a) 1. Land 160000 Discount on notes payable 97682 Notes payable 257682 a) 2. Equipment 193189 Discount on notes payable 36811 Notes payable 230000 PV of the amounts payble: Maturity value = 230000/1.10^8 = 107297 Interest = 230000*7%*(1.10^8-1)/(0.10*1.10^8) = 85892 193189 b) 1. Interest expense (160000*10%) 16000 Discount on notes payable 16000 b) 2. Interest expense (193189*10%) 19319 Discount on notes payable 3219 Interest payable (230000*7%) 16100