On June 1, 2020, Cheyenne Corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman

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Question:

On June 1, 2020, Cheyenne Corporation approached Silverman Corporation about buying a parcel of undeveloped land. Silverman was asking $261,000 for the land and Cheyenne saw that there was some flexibility in the asking price. Cheyenne did not have enough money to make a cash offer to Silverman and proposed to give, in return for the land, a $320,000, five-year promissory note that bears interest at the rate of 5%. 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. Silverman accepted the amended offer, and Cheyenne signed a mortgage note for $320,000 due June 1, 2025. Cheyenne would have had to pay 10% at its local bank if it were to borrow the cash for the land purchase. Silverman, on the other hand, could borrow the funds at 9%. Both Cheyenne and Silverman have calendar year ends.

1). Using (1) factor tables, (2) a financial calculator, or (3) Excel function PV, calculate the purchase price of the land and prepare an effective interest amortization table for the term of the mortgage note payable that is given in the exchange.

2). prepare the journal entry for the purchase of the land.

3). Prepare any adjusting entry that is required at the end of the fiscal year and the first payment made on June 1, 2021, assuming no reversing entries are used.

4). Assume that Silverman had insisted on obtaining an instalment note from Cheyenne instead of a mortgage note. Using (1) factor tables, (2) a financial calculator, or (3) Excel function PMT, calculate the amount of the instalment payments that would be required for a five-year instalment note. (Hint: Refer to Chapter 3 for tips on calculating.) Use the same cost of the land to Cheyenne Corporation that you determined for the mortgage note in a previous part of the question

5). Assume that Silverman had insisted on obtaining an instalment note from Cheyenne instead of a mortgage note. Prepare an effective interest amortization table for the five-year term of the instalment note.

6). Prepare the journal entry for the purchase of the land and the issuance of the instalment note.

7). Prepare any adjusting journal entry that is required at the end of the fiscal year and the first payment made on June 1, 2021, assuming no reversing entries are used.

8). Compare the balances of the two different notes payable and related accounts at December 31, 2020. Be specific about the classifications on the statement of financial position.