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Entry required:
1: record the purchase of land in situation A.
2: record the interest expense at year end for situation A.
3: Record the purchase of office equipmment in situation B.
4: Record the interest expense at year end for situation B.
5: Record the purchase of the building in situation C.
6: Record the interest expense at year end for situation C.
At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year-end. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) A The company issued a two-year, 1096, $680,000 note in exchange for a tract of land. The current market rate of interest is 10%. B. Lambert acquired some office equipment with a fair value of $133,636 by issuing a one-year, $140,000 note. The stated interest on the note is 5% C. The company purchased a building by issuing a three-year installment note. The note is to be repaid in equal installments of $1 million per year beginning one year hence. The current market rate of interest is 10%. Required: Prepare the journal entries to record each of the three transactions and the interest expense at the end of the first year for each. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field. Do not round intermediate calculations. Enter your answers in whole dollar.)
Expert Answer
1 Purchasr of land in situation A
A Land $680,000
Notes payable $680,000
A Interest expenses $68,000
Cash $68,000 (680,000*10%)
B Office equipment $133,636
Discount on notes payable $ 6,364
Notes payable $140,000
Note: the discount rate that equates the PV of debt and future vaule ($133,636) /$147,000= 0.90909
7000=140,000*0.05 therefore total cost ($140,000+$7,000)
PV factor for 0.90909 is equals to 10%
for effective interest rate = $7,000*0.90909 $6364
= $140,000*0.90909 $127,272
Present value of notes = $133,636
so interest expenses for ordinary annuity (10%$133,636) $13,363
cash $7,000
B Interest expenses $13,363
Discounts on notes payable $6,363
Cash $7,000
C Building $2,486,850
Notes payable $2,486,850
C Interest expenses $248,685
Notes payable $75,315
Cash $1,000,000
For instalments payments
1,000,000*2.48685= 2,486,850
Interest expenses (10%*$2,486,850) $248,685
