Question

The company purchased a piece of equipment. Terms of the purchase were as follows: $10,000 in cash immediately, followed by note payments of $20,000 at the end of each year for the next eight years. The market rate of interest is 9%.

Make the journal entry necessary to record the initial purchase. Round all answers to the nearest whole dollar.

Make the journal entries necessary to record the first cash payment of $20,000 at the end of the first year. Round your answers to the nearest whole dollar.

Answer 1

working note :

first let us know the present value of note payments:

annual payments * present value annuity factor

here,

annual payments = $20,000

present value of annuity factor = [1-(1+r)^(-n)] / r

r = 9%=>0.09

n=8

=>[1 -(1.09)^(-8)]/0.09

=>5.53481889

present value of note payments = $20,000 * 5.53481889

=>$110,696.

total purchase price of the equipment = $110,696+10,000 =>120,696.

the following are the journal entries:

sno	general journal	debit	credit
1	Equipment a/c	120,696
	...............To Cash a/c		10,000
	................To Notes payable		110,696
	(to record the initial purchase)
2	interest expense a/c	9,963
	notes payable	10,037
	.............To Cash a/c		20,000
	(to record first cash payment) (see below)

note:

interest on first note payment = 110,696 initial balance * 9% interest =>9,963.

note payable principal repaid in first payment = 20,000 installment payment - 9,963 interest payment =>10,037.