202589-10-51P

AID: 7725 | 12/06/2015

Working Notes:
(a) Determine the proportion of land and building in total cost:
The proportion of land and building should be determined on the basis of the cost of
land and building as below:
Land Cost
Cost of Land and Building
$132,000

$660, 000
20%

Proportion of land =

Hence, proportion of land is 20%. Remaining 80% should be apportioned to

building.
The remodelling and repair expenses prior to occupancy should be apportioned to
building only. Landscaping expenses should be capitalized under land improvements.
Apportion other combined expenses in proportion to cost of land and building as
shown below:
Details

Total ($) Land ($) -20% Building($)-80%

660,000
132,000
528,000
58,200
58,200
12,000
2,400
9,600
10,000
2,000
8,000
40,000
8,000
32,000
780,200
144,400
635,800

Cost
Remodeling and repairs
Escrow fee
Property tax
Real estate commission
Total

Hence, the total cost of land and building are $144,400 and $635,800 respectively.
(b) Calculate amount of discount on bond:
Present value of $344,098 has been calculated using excel formula = PV (rate, nper,
pmt, (fv)), where rate is interest rate (12% per annum or 6% semiannual, per is
number of period (10 years-2 payments each year), pmt is semiannual payment
($30,000) and fv is future value ($0). Putting relevant data and using excel formula
we get present value of $344,098.
Interest rate (compounded semiannually -12% 2)
Semiannual payment
Time (10 years 2)
Present value

6%
($30,000)
20
$344,098

(c) Calculate discount on note:

Discount on note is calculated by subtracting the present value of note from the face
value of the note as below:
Discount On Note = Face Value - Present Value
= $600, 000 $344, 098
$255,902

Therefore, discount on note is

$255,902

(1) Record journal entry for acquisition of land and building:

To record the journal entry debit all the assets including the discount on notes payable
and credit the notes payable and credit the cash with the remaining balance (balancing
figure) as below:
Date
July 1
2015

Details
Debit (S) Credit (S)
Land improvements
31,000
Land
144,400
Building
635,800
Discount on notes payable
255,902
Notes payable
600,000
Cash
467,102
[To Record land, building and land
improvements at apportioned cost.
Cash payment made for remaining
amount after payment through notes
payable.]

(2) Record journal entry for first two semiannual payments including
amortization of note discount Calculate interest expense for each period:
Interest shall be calculated at the rate of 6% on the principal outstanding during that
period. Calculate interest as shown below:
Date

Semiannual Principal ($) Interest ($)

Principal
payment ($)
outstanding ($)
1st July 2015
5344,098
31st Dec 2015
30,000
59,354
520,646
5334,743
30th June 2016
30,000
59,915
520,085
5324,828

Record journal entry:

Record the following adjusting entries:
Date

Details

31-Dec-15 Notes payable

Cash
(To Record semiannual payment on
notes)
31-Dec-15 Interest expense
Discount on notes payable
(To Record amortization of discount on
notes payable - S344, 098 6%)
30-Jun-16 Notes payable
Cash
(To Record semiannual payment on
notes)
31-Dec-15 Interest expense
Discount on notes payable
(To Record amortization of discount on
notes payable - $334, 743 6%)

Debit ($) Credit

($)
30,000
30,000
20,646
20,646
30,000
30,000
20,085
20,085