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On January 1, 2020, Blossom Corp
On January 1, 2020, Blossom Corp. issued $1,070,000 of five-year, zero-interest-bearing notes along with warrants to buy 1,000,000 common shares at $20 per share. On January 1, 2020, Blossom had 9.3 million common shares outstanding and the market price was $19 per share. Blossom Corp. received $1,000,000 for the notes and warrants. If offered alone, on January 1, 2020, the notes would have been issued to yield 10% to the creditor. Assume that the company follows IFRS.
Prepare the journal entry to record the issuance of the zero-interest-bearing notes and warrants for the cash consideration that was received. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,250.)
|
Date |
Account Titles and Explanation |
Debit |
Credit |
|
January 1, 2020 |
Prepare an amortization table for the notes using the effective interest method. (Round answers to 0 decimal places, e.g. 5,275.)
| SCHEDULE FOR INTEREST AND DISCOUNT AMORTIZATION— | ||||||||
| EFFECTIVE INTEREST METHOD | ||||||||
| Cash | Effective | Discount | Carrying | |||||
| Date | Interest | Interest | Amortized | Amount | ||||
| 1/1/20 | $ | |||||||
| 12/31/20 | $ | $ | $ | |||||
| 12/31/21 | ||||||||
| 12/31/22 | ||||||||
| 12/31/23 | ||||||||
| 12/31/24 | ||||||||
| Total | $ | $ | $ | |||||
Prepare adjusting journal entry for Blossom Corp. at the end of its fiscal year of December 31, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)
|
Date |
Account Titles and Explanation |
Debit |
Credit |
|
December 31, 2020 |
|||
Expert Solution
A.The entry for the issuance of the notes on January 1, 2020:
The present value of the note is: $1,070,000 X 0.62092 (factor for a single payment in 5 years at 10%) = $664,384
|
Date |
Account Titles and Explanation |
Debit |
Credit |
January 1, 2020 Cash 1,000,000
Notes Payable 664,384
Contributed Surplus—Stock Warrants. 335,616
B.
SCHEDULE FOR INTEREST AND DISCOUNT AMORTIZATION—EFFECTIVE INTEREST METHOD
| Date | Cash interest | Effective interest | Discount amortized |
Carrying amount |
|
1/1/20 |
$0 | $664,384 | ||
|
12/31/20 |
0 | $66,438* | $66,438 | 730,822** |
|
12/31/21 |
0 | 73,082 | 73,082 | 803,904 |
|
12/31/22 |
0 | 80,390 | 80,390 | 884,294 |
|
12/31/23 |
0 | 88,429 | 88,429 | 972,723 |
|
12/31/24 |
0 | 97,272 | 97,272 | 1,069,995 |
| Total | 0 | $405,611 | $405,611 |
*$664,384 X 10%
**$664,384+$66,438
C. adjusting journal entry for Blossom Corp. at the end of its fiscal year of December 31, 2020
|
Date |
Account Titles and Explanation |
Debit |
Credit |
December 31 2020 Interest Expense $66,438
Notes Payable $66,438
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