Chapter 14 Problem 14-10 At the beginning of the year, Lambert Motors issued the

Question

Chapter 14 Problem 14-10 At the beginning of the year, Lambert Motors issued the three notes described below. Interest is paid at year end. 1) The company issued a two-year, 12%, 600,000 note in exchange for a tract of land. The current market rate of intrest is 12%. 2) Lambert acquired some office equipment with a fair value of 94,643 by issuing a one-year, 100,000 note. The stated interest on the note is 6%. 3) The company purchased a building by issuingh a three-year installment note. The note is to be reqpaid in equal instalments of $1 million per year beginning one year hence. The current market rate of interest is 12%. Prepare the journal entries to record each of the three transactions and the interest expense at the end of the first year for each.

Explanation / Answer

FOLLOW THIS Purchased $38,000 of merchandise on credit from Frier, terms are 1/10, n/30. Tytus uses the perpetual inventory system. Dr Merchandise Inventory 38,000 Cr Accounts Payable 38,000 May 19 Replaced the April 20 account payable to Frier with a 90-day, $30,000 note bearing 8% annual interest along with paying $8,000 in cash. Dr Accounts Payable 38,000 Cr Notes Payable 30,000 Cr Cash 8,000 July 8 Borrowed $57,000 cash from Community Bank by signing a 120-day, 12% interest-bearing note with a face value of $57,000. Dr Cash 57,000 Cr Notes Payable 57,000 Aug 17 Paid the amount due on the note to Frier at the maturity date. 30,000 x 8% x 90/360 = $600 interest Dr Notes Payable 30,000 Dr Interest Expense 600 Cr Cash 30,600 Nov. 5 Paid the amount due on the note to Community Bank at the maturity date. 57,000 x 12% x 120/360 = $2,280 interest Dr Notes Payable 57,000 Dr Interest Expense 2,280 Cr Cash 59,280 Nov. 28 Borrowed $30,000 cash from UMB Bank by signing a 60-day, 6% interest-bearing note with a face value of $30,000. Dr Cash 30,000 Cr Notes Payable 30,000 Dec. 31 Recorded an adjusting entry for accrued interest on the note to UMB Bank. 33 days of interest has accrued 30,000 x 6% x 33/360 = $165 accrued interest Dr Interest Expense 165 Cr Interest Payable 165 2011 Jan. 27 Paid the amount due on the note to UMB Bank at the maturity date. 27 more days of interest expense has accrued. 30,000 x 6% x 27/360 = $135 more accrued interest Dr Notes Payable 30,000 Dr Interest Payable 165 Dr Interest Expense 135 Cr Cash 30,300 With these journal entries you should be able to answer the questions 1.Determine the maturity date for each of the three notes described (Frier, Com Bank, UMB) 2.Determine the interest expense to be recorded in the adjusting entry at the end of 2010. (Frier, Com Bank, UMB) 3.Determine the interest due at maturity for each of the three notes. 4. Determine the interest expense to be recorded in 2011. ***Use 360 day year*** 5.Prepare journal entries fo

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