Desrocher Ltd. issued an instalment note on January 1, 2012, in exchange for land that it purchased from Safayeni Ltd. Safayeni’s real estate agent had listed the land on the market for $120,000. The implied interest rate is 9%. The note calls for three equal blended payments of $43,456 that are to be made at December 31, 2012, 2013, and 2014.
Instructions
(a) Discuss how the purchase price of the land will be established.
(b) Using time value of money tables, a financial calculator, or computer spreadsheet functions, prove that the note will cost Desrocher Ltd. 9% interest over the note’s full term.
(c) Prepare an effective-interest amortization table for the instalment note for the three-year period.
(d) Prepare Desrocher’s journal entry for the purchase of the land.
(e) Prepare Desrocher’s journal entry for the first instalment payment on the note on December 31, 2012.
(f) From Safayeni Ltd.’s perspective, what are the advantages of an instalment note compared with a regular interest- bearing note?