HOMEWORK ON LONG-TERM NOTES PAYABLE

Journalize the following:

1. Interest bearing: principal – lump sum, interest – annual; effective rate higher than the nominal rate

Diaz Company constructed for Cruz Distributors a warehouse that was completed and ready for
occupancy on January 1, 2019. Cruz paid for the warehouse by issuing a P1,000,000 four–year note
that required 7% interest to be paid on December 31 of each year. The warehouse was custom–built for
Cruz, so its cash price was not known. By comparison with similar transactions, it was determined that
an appropriate interest rate was 10%.

2. Interest bearing: principal – installment, interest – annual; effective rate same as the nominal rate
Santos

Company acquired a packaging machine from Reyes Corporation. Reyes completed the construction
of the machine on January 1, 2019. In payment for the P3 million machine, Santos issued a 4–year
interest–bearing note to be paid in four equal payments at the end of each year. Interest is 10% of the
unpaid balance to be paid at the end of each year. Assume prevailing interest rate is 10%.

3. Non-interest bearing: principal – installment

On January 1, 2019, Dela Cruz Company purchased land for P500,000 by issuing a 5–year non–interest
bearing promissory note payable in five equal annual payments every December 31. The prevailing
market rate for a note of this kind is 11%.

4. Non-interest bearing: principal – lump sum

On January 1, 2019, Lopez Company purchased equipment for P375,000. The company paid P75,000
and signed a non–interest bearing note for the balance which is due after 3 years. Prevailing interest
rate is 11%.

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