Question

In: Accounting

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.  The press was installed...

Hornet Motors purchased a custom-made metal press for use in repairing wrecked cars.  The press was installed on January 2, 2016. The press had a market value of $300,000. Hornet agreed to pay for the press in three equal installments beginning December 31, 2016. At the time, Hornet's incremental borrowing rate was 7%.

Required:  Compute the installment payments and prepare the three year amortization table for the note payable. Prepare the journal entries to record the purchase of the machine, the first annual payment, and the final payment on the note.

I do not understand how do you get the cash payments.

Solutions

Expert Solution

1)Equal installments = market value of press /PVA 7%,3

            = 300000 / 2.62432

            = 114315.33 rounded

**find present value annuity factor from table at 7% for 3 periods or using the formula : 1/(1+.07)^1+ 1/(1+.07)^2+ 1/(1+.07)^3   which gives as 1/(1.07)^1+ 1/(1.07)^2+ /(1+.07)^3

2)

year Installment paid Interest expense decrease in carrying value carrying value at end
300000
1 114315.33 21000   [300000*.07] 114315.33-21000= 93315.33 300000-93315.33= 206684.67
2 114315.33 14467.93   [206684.67*.07] 99847.40 206684.67-99847.4= 106837.27
3 114315.33 7478.06     [106837.27*.07] 106837.27 0

3)

Date Account Debit credit
jan 2 2016 machinery 300000
Note payable 300000
31 dec 2016 Interest expense 21000
Note payable 93315.33
cash 114315.33
31 dec 2018 Interest expense 7478.06
Note payable 106837.27
cash 114315.33

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