(Entries for Zero-Interest-Bearing Debt) On January 1, 2014, Fisher Company makes the twofollowing acquisitions.1. Purchases land having a fair market value of $800,000 by issuing a 5-year, zero-interest-bearingpromissory note in the face amount of $1,175,464.2. Purchases equipment by issuing a 4%, 8-year promissory note having a maturity value of$350,000(interest payable annually).The company has to pay 8% interest for funds from its bank.Instructions(a) Record the two journal entries that should be recorded by Fisher Company for the twopurchaseson January 1, 2014.(b) Record the interest at the end of the first two years on both notes using the effective-interestmethod.

Answered: Instructions (a) Record the two journal…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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(Entries for Zero-Interest-Bearing Debt) On January 1, 2014, Fisher Company makes the two
following acquisitions.
1. Purchases land having a fair market value of $800,000 by issuing a 5-year, zero-interest-
bearing
promissory note in the face amount of $1,175,464.
2. Purchases equipment by issuing a 4%, 8-year promissory note having a maturity value of
$350,000
(interest payable annually).
The company has to pay 8% interest for funds from its bank.
Instructions
(a) Record the two journal entries that should be recorded by Fisher Company for the two
purchases
on January 1, 2014.
(b) Record the interest at the end of the first two years on both notes using the effective-interest
method.

Expert Solution

Step 1

(1) Calculation of Effective Interest rate on Zero interest bearing bonds

800,000(1+r)n	1175464
800,000(1+r)5	1175464
(1+r)5	1.46933
(1+r)	1.08
r	8%

Land shall be recognized at its fair value upon initial recognition in accordance with IAS 12, if the asset is acquired for non monetary consideration.

(2) Calculation of fair value of 4%, 8 years promissory note

Year	Cash flow	PVF @ 8%	PV of Cash flow
1 to 8	14,000	6.7466	94,453
8	350,000	0.5403	189,094
Initial Recognition			283,547

(3) Amortization Schedule for first 2 years of 4%, 8 years promissory note

Year	Opening Balance	Interest Expense	Interest Paid	Closing Balance
2014	283,547	22,684	14,000	292,231
2015	292,231	23,378	14,000	301,609

(4) Calculation of Interest at the end of first two years

Particulars	4%, 8 years promissory note	Zero Interest bearing promissory note
Opening Balance	283,547	800,000
Interest rate	8%	8%
Interest expense for year ended 2014	22,684	64,000
Closing balance as on 31-12-2014	306,231	864,000
Interest expense for year ended 2015	23,378	69,120
Closing balance as on 31-12-2015	301,609	933,120

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