Question

In: Accounting

On January 1, Snipes Construction paid for earth moving equipment by issuing a 350,000, 2 year...

On January 1, Snipes Construction paid for earth moving equipment by issuing a 350,000, 2 year note that specified 4% interest to be paid on December 31 of each year. The equipments retail cash price was unknown, but it was determined that a reasonable interest rate was 7%

At what amount should Snipes record the equipment and the note?

what journal entry should it record for the transaction?

n=
i=
Loan repayments       Amount Present Value
Interest
Principal
Price of equipment

Solutions

Expert Solution

Solution:
1.
n=2
i=7%
Loan repayments       Amount Present Value
Interest 14,000                        25,312
Principal 350,000                     305,704
Price of equipment                     331,016
Working Notes:
n=2
i=7%
Loan repayments       Amount PVF Present Value
Interest 14,000 1.80802 25312 I
[350,000 x 4%] (a)
Principal 350,000 0.87344 305704 II
Price of equipment (b) 331016 III = I + II
(a)   Present value of an ordinary annuity of $1:n= 2,i= 7% is 1.80802
(b) Present value of $1: n = 2, i = 7% is 0.87344
Notes: Notes payable charged 4% , but market interest rate is 7 % hence, interest & principal payment is discounted using 7% value.
2.
General Journal Debit Credit
Equipment 331,016
Discount on notes payable 18,984
Notes payable 350,000
Working Notes:
General Journal Debit Credit
Equipment 331,016 a
[Calculated in (1) ]
Discount on notes payable 18,984 b=a-c
[balancing figure]
Notes payable 350,000 c
[ face value of Notes payable]
Please feel free to ask if anything about above solution in comment section of the question.

ekkarill92 answered 2 years ago
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