On Jan 1, 2018, Rising Star purchased a crane for $ 1,200,000 and paid $200,000 as...

On Jan 1, 2018, Rising Star purchased a crane for $ 1,200,000 and paid $200,000 as a downpyament while the balance will be paid over the next five years in installments of $100,000 every six months , starting July 1, 2018. The market rate on Jan 1, 2018 was 9%.

Requirements:
a. For the how much the company should recognize the crane on Jan 1, 2018? Show your calculation along with your accounting entry to recognize the purchase of the crane.
b. On Jan 1, 2020, the company will pay installment payment of $100,000. How much of this payment represents a payment of the principal and how much of it represents a payment of the interest? Show your calculation (fill in the following table Jan 1 2018 – Jan 2020).

Date	Cash Paid	Interest Exp.	P Payment	Carrying Value
1-Jan-18	$ -	$ -	$ -	$ ………….
1-Jul-18
1-Jan-19
1-Jul-19
1-Jan-20

c. What is the total interest expense for the year ended on Dec 31, 2018?
d. What will be the carrying value of the notes on Dec 31, 2019?

Expert Solution

Background :
The given Question provides the understanding about the recording of an asset which is purchased at deferred payment basis and it's amortisation in the books of accounts of the company.

As per the accounting standards/rules applicable, the cost of the asset purchased under deferred payment shall be equal to the cash price of the asset so purchased. Hence, in the given case the cost to be recorded in the books shall be $1.2mn.

Journal Entry to be made as on Jan 01,2018

Particulars	Dr (in $)	Cr (in $)
Crane	1200000
Cash		200000
Notes Payable		1000000

Date	Opening O/S	Cash Paid	Interest	Principal	Carrying Value
01.01.2018	1000000	-	0	0	=B8
01.07.2018	=F8	100000	=B90.096/12	=C9-D9	=B9+D9-C9
01.01.2019	=F9	100000	=B100.096/12	=C10-D10	=B10+D10-C10
01.07.2019	=F10	100000	=B110.096/12	=C11-D11	=B11+D11-C11
01.01.2020	=F11	100000	=B120.096/12	=C12-D12	=B12+D12-C12

Date	Opening O/S	Cash Paid	Interest	Principal	Carrying Value
01.01.2018	1000000	-	0	0	1000000
01.07.2018	1000000	100000	45000	55000	945000
01.01.2019	945000	100000	42525	57475	887525
01.07.2019	887525	100000	39939	60061	827464
01.01.2020	827464	100000	37236	62764	764699

The amount of interest paid is $37,236 and principal is $62,764.

c) Total interest expense for the year 2018 is the sum total of interest amount represented in the above table for the payments made on July01, 2018 and Jan 01, 2019, since this represent that the entity has used the deferred payment facility for the complete year down the line.
Hence amount of interest to be debited to Statement of Profit and Loss is $45000+$42525 = $87525.

d) The carrying amount of the notes payable as on Jan 01, 2020 or Dec 31,2019 is $764,700 (rounded off) as shown in the table above.

ekkarill92 answered 7 months ago

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