Fixed Asset Purchases with Note

On June 30, Collins Management Company purchased land for $560,000 and a building for $840,000, paying $700,000 cash and issuing a 6% note for the balance, secured by a mortgage on the property. The terms of the note provide for 20 semiannual payments of $35,000 on the principal plus the interest accrued from the date of the preceding payment.

If an amount box does not require an entry, leave it blank.

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a. Journalize the entry to record the transaction on June 30.

June 30	BuildingCashInterest ExpenseNotes PayableNotes ReceivableBuilding	Building	Building
	CashInterest ExpenseLandNotes PayableNotes ReceivableLand	Land	Land
	BuildingInterest ExpenseLandNotes PayableNotes ReceivableNotes Payable	Notes Payable	Notes Payable
	BuildingCashInterest ExpenseLandNotes ReceivableCash	Cash	Cash

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Feedback

Determine what the company is acquiring and how they are paying for this purchase.

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b. Journalize the entry to record the payment of the first installment on December 31.

Dec. 31	BuildingCashInterest RevenueNotes PayableNotes ReceivableNotes Payable	Notes Payable	Notes Payable
	BuildingCashInterest ExpenseInterest RevenueNotes ReceivableInterest Expense	Interest Expense	Interest Expense
	CashInterest ExpenseInterest RevenueNotes PayableNotes ReceivableCash	Cash	Cash

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Feedback

Pay attention to dates and remember that all interest rates are expressed in annual terms. What affect will this installment payment have on the amount owed?

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c. Journalize the entry to record the payment of the second installment the following June 30.

June 30	Accounts PayableCashInterest RevenueNotes PayableNotes ReceivableNotes Payable	Notes Payable	Notes Payable
	Accounts PayableCashInterest ExpenseInterest RevenueNotes ReceivableInterest Expense	Interest Expense	Interest Expense
	Accounts PayableCashInterest ExpenseNotes PayableNotes ReceivableCash	Cash	Cash