The company has to pay 11 interest for funds from its bank Instructions a

The company has to pay 11 interest for funds from its

This preview shows page 13 - 18 out of 53 pages.

The company has to pay 11% interest for funds from its bank. Instructions: (a) Record the two journal entries that should be recorded by McLean Company for the two purchases on January 1, 2011. (b) Record the interest at the end of the first year on both notes using the effective interest method. (1) Purchases land having a fair market value of $300,000 by issuing a 5-year, zero-interest- bearing promissory note in the face amount of $505,518. 1-Jan-11 Land 300,000 Discount on Notes Payable 205,518 Notes Payable 505,518 (The $300,000 capitalized land cost represents the present value of the note discounted for five years at 11%). (2) Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest payable annually). Equipment 297,078.88 Discount on Notes Payable* 102,921.12 Notes Payable 400,000 *Computation of the discount on notes payable Maturity value $400,000 Present value of $400,000 due in 8 years at 11% - $400,000 * .43393 $173,572.00 Present value of $24,000 payable annually for 8 years at 11% annually - 24,000 X 5.14612 123,506.88 Present value of the note $297,078.88 Discount $102,921.12 1b Interest Expense 33,000 Discont on Notes Payable 33,000 ($300,000 * .11)
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2b Interest Expense ($297,078.88 * .11) 32,678.68 Discount on Notes Payable 8,678.68 Cash ($400,000 * .06) 24,000.00
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Exercise 14-20 - Settlement of Debt Strickland Company owes $200,000 plus $180,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2010, Strickland's business deteriorated due to a a faltering regional economy. On December 31, 2010, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair market value of $180,000. Instructions: (a) Prepare journal entries for Strickland Company and Moran Bank to record this debt settlement. To record transfer or property on December 31, 2007: Strickland Company (Debtor): Note Payable 200,000 Interest Payable 18,000 Accumulated Depreciation - Machine 221,000 Machine 390,000 Gain on Disposition of Machine 11,000 * Gain on Debt Restructuring 38,000 ** To determine Gain on Disposition of Machine: $180,000 - ($390,000 - $221,000) = $11,000 To determine Gain on Debt Restructuring: ($200,000 + $18,00) - $180,000 = $38,000 Moran State Bank (Creditor): Machine 180,000 Allowance for Doubtful Accounts 38,000 Note Receivable 200,000 Interest Receivable 18,000 (b)How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2010 income statement. "Gain on Machine Disposition" and the "Gain on Debt Restructuring" should be reported as an © Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock ($10 par) which has a fair market value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland's stock as a trading investment, prepare the entries to record the transaction for both parties. ordinary gain in the income statement in accordance with APB Opinion No. 30 and SFAS No. 145.
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Granting of equity interest on December 31, 2010: Strickland Company (Debtor): Note Payable 200,000 Interest Payable 18,000 Common Stock 150,000 Additional Paid-in Capital 30,000 Gain on Debt Restructuring 38,000 Moran State Bank (Creditor): Investment (Trading) 180,000 Allowance for Doubtful Accounts 38,000 Note Receivable 200,000 Interest Receivable 18,000
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Exercise 14-21 (Term Modificaiton without Gain - Debtor's Entries)
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