Submitted by: Limense, Princess Kathleen S.

(URBOSA & REVALI COMPANY)

(1) On January 1, 2020, Urbosa Company acquired a tract of land for P1,000,000. The entity paid
P100,000 down and signed a two-year promissory note for the balance plus 10% interest compounded
annually. The note matures on January 1, 2022.

REQUIRED: Prepare the journal entries to record: (a) the purchase of land on January 1, 2020, (b)
accrued interest on December 31, 2020, (c) accrued interest on December 31, 2021, and (d) full
payment of the note on January 1, 2022.

Answer:

1. Land 1,000,000
Cash 100,000
Note payable 900,000

2. Interest Expense (10% x 900,000) 90,000

Accrued Interest payable 90,000

3. Interest expense 99,000

Accrued interest payable (900,000/90,000 x 10%) 99,000

4. Note payable (20,000 shares x 30) 900,000

Accrued interest payable 189,000
Cash 1,089,000

(2) On January 1, 2020, Revali Company acquired a tract of land for P5,250,000. The entity paid
P1,250,000 down and signed a noninterest bearing note for the balance which is due on January 1,
2023.

There was no established exchange price for the land and the note had no ready market. The prevailing
interest rate for this type of note was 12%. The present value of 1 at 12% for 3 periods is 0.7118.

REQUIRED: Prepare the journal entries to record purchase of land on January 1, 2020, interest expense
for 2020 and full payment of the note on January 1, 2023.

Answer:

1. Land (1,250,000 + 2,847,500) 4,097,000

Discount on note payable 1,152,800
Cash 1,250,000
Note payable 4,000,000

Face value of note payable 4,000,000

Present value 2,847,200
Imputed interest 1,152,800

2. Interest expense 341,664

Discount on note payable (12% x 2,847,200) 341,664

3. Note payable 4,000,000

Cash 4,000,000