On January 1, 2020, Marigold Company makes the two following acquisitions.

1. Purchases land having a fair value of $270,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $475,832.
2. Purchases equipment by issuing a 7%, 8-year promissory note having a maturity value of $360,000 (interest payable annually). The company has to pay 12% interest for funds from its bank.

Required:
a. Record the two journal entries that should be recorded by Marigold Company for the two purchases on January 1, 2020.
b. Record the interest at the end of the first year on both notes using the effective-interest method.

b. The journal entries to record the interest at the end of the first year on both notes using the effective-interest method are as follows:

1. Debit Interest $32,400

Credit Discount on Notes $32,400

Cash $0

2. Debit Interest $25,200

Credit Discount on Notes $18,000

Cash $7,200

Effective-Interest Method:

Using the effective-interest method, interest is calculated each period as the effective-interest rate times the bond's carrying value. We can use an online finance calculator as follows:

Data and Calculations:

N (# of periods) = 5 years

I/Y (Interest per year) = 12%

PMT (Periodic Payment) = $0

FV (Future Value) = $475,832

Results:

PV = $270,000

Sum of all periodic payments = $269,999.86

Total Interest = $291,017.52

N (# of periods) = 8 years

I/Y (Interest per year) = 12%

PMT (Periodic Payment) = $25,200 ($360,000 x 7%)

FV (Future Value) = $360,000

Results:

PV = $270,582.48

Sum of all periodic payments = $201,600.00

Total Interest = $205,832.1

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