Rojas Purchased Land On April 1, 20x4, For $100,000

B 1301on April 1 20x4 Rojas Purchased Land By Giving 100000 In Ca

On April 1, 20X4, Rojas purchased land by paying $100,000 in cash and executing a $400,000 note payable to the previous owner. The note bears interest at 10% annually, payable each March 31, with a $100,000 principal payment due every March 31. The task involves preparing journal entries for the land purchase, annual interest accruals, and principal and interest payments for subsequent years.

Paper For Above instruction

Rojas’s acquisition of land involves recording multiple financial transactions, such as initial purchase, accrued interest, and payments toward the note. First, the journal entry on April 1, 20X4, should reflect the acquisition of land and the corresponding liabilities. The land account is debited for its cost, while the cash is credited for the amount paid, and a note payable is credited for the balance owed. Since cash was paid and a note was executed, the initial journal entry would include debiting the land account and crediting cash and notes payable.

To record the initial land purchase on April 1, 20X4:

  • Debit Land for $500,000 (cash paid plus note value)
  • Credit Cash for $100,000
  • Credit Notes Payable for $400,000

Subsequent entries will include accruing interest expense at year-end and recording payments toward the note. The annual interest expense can be computed as 10% of the outstanding note balance. Since the note balance decreases with principal payments, interest accrual on December 31 of each year involves calculating interest on the note’s outstanding principal at that date and recording an interest payable or interest expense.

For interest accrual at December 31, 20X4, the interest expense is 10% of $400,000, which equals $40,000. The journal entry would then involve debiting Interest Expense for $40,000 and crediting Interest Payable for the same amount.

On March 31, 20X5, when the interest is paid, and the principal payment is made, the journal entries include paying off accrued interest and making principal payments. Specifically, the entries would debit Interest Payable and Credit Cash for interest paid ($40,000), and debit Notes Payable for $100,000 (principal payment) with a corresponding credit to Cash.

For subsequent years, similar calculations are performed, with adjustments if the note balance decreases due to principal payments, leading to a decrease in interest expense over time. Ensuring accurate reflection of accrued interest, payments, and note balances maintains proper financial statements and compliance with accounting standards for liabilities and interest expenses.

References

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