Question

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.

Answer 1

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