Question

Sarasota Corporation purchased a computer on December 31, 2016, for $121,800, paying $34,800 down and agreeing to pay the balance in five equal installments of $17,400 payable each December 31 beginning in 2017. An assumed interest rate of 8% is implicit in the purchase price.

a. Prepare the journal entry at the date of purchase.

b. Prepare the journal entry at December 31, 2017, to record the payment and interest (effective-interest method employed).

c. Prepare the journal entry at December 31, 2018, to record the payment and interest (effective-interest method employed).

Answer 1

Solution a:

Cash price of computer = Present value of down payment and installments

= $34,800 + $17,400 * cumulative PV Factor at 8% for 5 periods

= $34,800 + $17,400*3.99271

= $104,273

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-16	Computer Dr	$104,273.00
	To Cash		$34,800.00
	To Accounts Payable		$69,473.00
	(To record purchase of computer)

Solution b:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-17	Interest expense Dr ($69,473*8%)	$5,558.00
	Accounts payable Dr	$11,842.00
	To Cash		$17,400.00
	(To record payment of first EMI)

Solution c:

Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Interest expense Dr [($69,473-$11,842)*8%]	$4,610.00
	Accounts payable Dr	$12,790.00
	To Cash		$17,400.00
	(To record payment of 2nd EMI)