Question
In: Accounting
Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use...
Braxton Technologies, Inc., constructed a conveyor for A&G
Warehousers that was completed and ready for use on January 1,
2021. A&G paid for the conveyor by issuing a $125,000,
four-year note that specified 5% interest to be paid on December 31
of each year, and the note is to be repaid at the end of four
years. The conveyor was custom-built for A&G, so its cash price
was unknown. By comparison with similar transactions it was
determined that a reasonable interest rate was 12%
Required:
1. Prepare the journal entry for A&G’s
purchase of the conveyor on January 1, 2021.
2.Prepare an amortization schedule for the
four-year term of the note.
3. Prepare the journal entry for A&G’s third
interest payment on December 31, 2023.
4.If A&G’s note had been an installment note
to be paid in four equal payments at the end of each year beginning
December 31, 2021, what would be the amount of each
installment?
5. By considering the installment payment of
requirement 4, prepare an amortization schedule for the four-year
term of the installment note.
6. Prepare the journal entry for A&G’s third
installment payment on December 31, 2023.
Solutions
Expert Solution
Answer 1
| Interest paid (125000*6%) | 7500 | ||
| Cash flow in 2021 with principal paid (125000+7500) | 132500 | ||
| Year | Cash flow | Discount factor @ 12% | Present value |
| 2021 | 7500 | 0.89286 | 6696 |
| 2022 | 7500 | 0.79719 | 5979 |
| 2023 | 7500 | 0.71178 | 5338 |
| 2024 | 132500 | 0.63552 | 84206 |
| Present value of Note | $ 102219 | ||
| Discount on notes payable (125000-102219) | $ 22781 | ||
| Journal entries | |||
| Date | General Journal | Debit | Credit |
| Jan 1, 2021 | Equipment | 102219 | |
| Discount on notes payable | 22781 | ||
| Notes Payable | 125000 | ||
| (To record capitalise value of equipment.) |
Answer 2
| Carrying value of Note payable = Previous year's Carrying value of Note payable + Increase in Balance | ||||
| Year | Effective Interest | Interest paid | Increase in Balance | Carrying value of Note payable |
| $ 102219 | ||||
| 2021 | $ 12266 | $ 7500 | $ 4766 | $ 106985 |
| 2022 | $ 12838 | $ 7500 | $ 5338 | $ 112323 |
| 2023 | $ 13479 | $ 7500 | $ 5979 | $ 118302 |
| 2024 | $ 14198 | $ 7500 | $ 6698 | $ 125000 |
| Total | $ 52781 | $ 30000 | $ 22781 |
Answer 3
| Journal entries | |||
| Date | General Journal | Debit | Credit |
| Dec 31, 2023 | Interest Expense | 13479 | |
| Cash | 7500 | ||
| Discount on notes payable | 5979 | ||
| (To record Interest expense for the year.) |
Answer 4
| Year | Discount factor @ 12% |
| 2021 | 0.89286 |
| 2022 | 0.79719 |
| 2023 | 0.71178 |
| 2024 | 0.63552 |
| Total | 3.03735 |
| Equipment value | 102219 |
| Divided by: Present value factor for annuity (i=12%,n=4) | 3.03735 |
| Installment payment | $ 33654 |
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