On January 1, 2020, Pearl Company makes the two following acquisitions. 1. Purchases land having a fair value of $360,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $606,621.
2. Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $560,000 (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 Pearl Company for the two purchases on January 1, 2020.
(b) Record the interest at the end of the first year on both notes using the effective-interest method.

a) journal entry to record land purchase

January 1, 2020

Dr Land 360,000

Dr Discount on notes payable 246,621

    Cr Notes payable 606,621

journal entry to record purchase of equipment

January 1, 2020

Dr Equipment 444,725.96

Dr Discount on notes payable 115,274.04

    Cr Notes payable 560,000

present value of $560,000 using bank interest rate = $560,000 / 1.11⁸ = $242,998.84

annual interest payment = $560,000 x 7% = $39,200

PV of annuity = $39,200 x 5.1461 (PV annuity factor, 11%, 8 periods) = $201,727.12

total present value of notes payable = $242,998.84 + $201,727.12 = $444,725.96

discount on notes payable = $560,000 - $444,725.96 = $115,274.04

b) interest expense for the first notes payable (used to purchase land) = $360,000 x 11% = $39,600

December 31, 2021, accrued interest expense on notes payable 1

Dr Interest expense 39,600

    Cr Discount on notes payable 39,600

interest expense for the second note

interest expense = $444,725.96 x 11% = $48,919.86

cash paid = $560,000 x 7% = $39,200

discount on notes payable = $48,919.86 - $39,200 = $9,719.86

December 31, 2021, accrued interest expense on notes payable 2

Dr Interest expense 48,919.86

    Cr Cash (or interest payable) 39,200

    Cr Discount on notes payable 9,719.86

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