Question

On June 30, Collins Management Company purchased land for $400,000 and a building for $560,000, paying $360,000 cash and issuing a 5% note for the balance, secured by a mortgage on the property. The terms of the note provide for 20 semiannual payments of $30,000 on the principal plus the interest accrued from the date of the preceding payment. Journalize the entry to record

a) the transaction on June 30.
b) the payment of the first installment on December 31.
c) the payment of the second installment the following June 30. Assume a 360-day year.

Answer 1

Answer with its Explanation:

Part A. On June 30, the land and Building purchased were worth $400,000 and $560,000 respectively. The cash paid was $360,000 and the remainder was financed by the 5% note which is $600,000.

Dr Land Account $400,000

Dr Building Account $560,000

Cr Cash $360,000

Cr 5% Note Payable (Balancing Figure) $600,000

Part B. On December 31, the interest expense for 6 months starting from June 30 to December 31 would be:

Interest Expense for 6 months = Interest payable on payables for the year * 6/12

Here

Payable Amount is $600,000

Interest Expense for 6 months = ($600000 * 5%) * 6/12 = $15,000

The semiannual payment of $30,000 would be paid which would also be recorded on this date.

So the double entry would be:

Dr Interest Expense $15,000

Dr 5% Note Payable $30,000

Cr Cash $45,000

Part C. On following June 30, the interest expense for 6 months starting from December 31 to June 30 would be:

Interest Expense for 6 months = Interest payable on payables for the year * 6/12

Now here

Payable Amount = $600,000 - $30,000 1st installment = $570,000

Interest Expense for 6 months = ($570000 * 5%) * 6/12 = $14,250

The semiannual payment of $30,000 would be paid which would also be recorded on this date.

So the double entry would be:

Dr Interest Expense $14,250

Dr 5% Note Payable $30,000

Cr Cash Account $44,250