Question

On June 1, 2011, MacDougall Corporation approached Silverman Corporation about purchasing a parcel of undeveloped land. Silverman was asking $240,000 for the land and MacDougall saw that there was some flexibility in the asking price. MacDougall did not have the necessary funds to make a cash offer to Silverman and proposed to give, in return for the land, a $300,000, five-year promissory note that bears interest at the rate of 4%. The interest is to be paid annually to Silverman Corporation on June 1 of each of the next five years. Silverman insisted that the note taken in return become a mortgage note. The amended offer was accepted by Silverman, and MacDougall signed a mortgage note for $300,000 due June 1, 2016. MacDougall would have had to pay 10% at its local bank if it were to secure the necessary cash for the land purchase. Silverman, on the other hand, could borrow the funds at 9%. Both MacDougall and Silverman have calendar year ends.
Instructions
(a) Discuss how MacDougall Corporation would determine a value for the land in recording the purchase from Silverman Corporation.
(b) What is the difference between a promissory note payable and a mortgage note payable? Why would Silverman Corporation insist on obtaining a mortgage note payable from MacDougall Corporation?
(c) Calculate the purchase price of the land and prepare an effective-interest amortization table for the term of the mort- gage note payable that is given in the exchange.
(d) Prepare the journal entry for the purchase of the land.
(e) Prepare any adjusting journal entry that is required at the end of the fiscal year and the first payment made on June 1, 2012, assuming no reversing entries are used.
(f) Assume that Silverman had insisted on obtaining an instalment note from MacDougall instead of a mortgage note. Then do the following:
1. Calculate the amount of the instalment payments that would be required for a five-year instalment note. Use the same cost of the land to MacDougall Corporation that you determined for the mortgage note in part (a).
2. Prepare an effective-interest amortization table for the five-year term of the instalment note.
3. Prepare the journal entry for the purchase of the land and the issuance of the instalment note.
4. Prepare any adjusting journal entry that is required at the end of the fiscal year and the first payment made on June 1, 2012, assuming no reversing entries are used.
5. Compare the balances of the two different notes payable and related accounts at December 31, 2011. Be specific about the classifications on the balance sheet.
6. Why would Silverman insist on an instalment note in this case?


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  • CreatedAugust 23, 2015
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