Question

On January 1, 2016, Billips Corporation purchased equipment having a fair value of $72,054.94 by issuing a $90,000 note, payable in three $30,000 annual installments beginning December 31, 2016.

Required:

Prepare (1) the journal entry to record the purchase of the equipment, (2) a schedule to compute the annual interest expense, and (3) the journal entries to record yearly interest expense and note repayments over the life of the note.

General Journal

Prepare the journal entry to record the purchase of the equipment on January 1, 2016 and a single entry on December 31, 2016, 2017 and 2018 to record the annual interest expense and the installment payment on the note. Additional Instructions

PAGE 2016PAGE 2017PAGE 2018

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7

Analysis

Prepare a schedule to compute the annual interest expense. Additional Instructions

Billips Corporation

1		2016	2017	2018
2	Note payable (beg. of year)
3	Less: Unamortized discount
4	Carrying value (beg. of year)
5	Effective interest rate
6	Interest expense and discount amortization

Answer 1

DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1)
Jan 1 2016	Equipment		$    72,054.94
	Discount on Notes Payable		$    17,945.06
	Notes Payable			$    90,000.00
	(To record the purchase of the equipment)
2)
Prepare a schedule to compute the annual interest expense. Additional Instructions
Billips Corporation	2016	2017	2018
Note payable (beg. of year)	$                                                       90,000.00	$                        90,000.00	$    90,000.00
Less: Unamortized discount	$                                                       17,945.06	$                        11,963.37	$      5,981.69
Carrying value (beg. of year)	$                                                       72,054.94	$                        78,036.63	$    84,018.31
Effective interest rate = 30000/Carrying Value	41.63%	38.44%	35.71%
Interest expense and discount amortization	$                                                       30,000.00	$                        30,000.00	$    30,000.00
3)
Interest Expenses	$                                                       35,981.69
Discount on discount Payable (17,945.06/3)		$                          5,981.69
Cash		$                        30,000.00
A	B	C	D	E	F	G
Period	Interest Payment	Interest exp.= 8%/2 x Previous BV in G	Amortisation of bond discount (C - B)	Debit Bal. Bond discount	Cr. balance Bonds payable account	Book value of bond (F-E)
0				$    17,945.06	$ 90,000.00	$ 72,054.94
1	30000	$                        35,981.69	$      5,981.69	$    11,963.37	$ 90,000.00	$ 78,036.63
2	30000	$                        35,981.69	$      5,981.69	$      5,981.69	$ 90,000.00	$ 84,018.31
3	30000	$                        35,981.69	$      5,981.69	$                -	$ 90,000.00	$ 90,000.00