Question

On October 30, 2016, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%. Required: 1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used. 2. Show how the preceding items would be reported on the December 31, 2016, balance sheet.

Answer 1

Journal entries
Date	Particulars			Debit	credit
30-Oct	machinery			21779
	discount on notes payable			2221
	notes payable				24000
31-Dec	interest exp			581
	discount on notes payable				581
31-Jan	interest exp			290
	notes payable			6000
	discount on notes payable				290
	cash				6000
30-Apr	interest exp			666
	notes payable			6000
	discount on notes payable				666
	cash				6000
31-Jul	interest exp			453
	notes payable			6000
	discount on notes payable				453
	cash				6000
30-Oct	interest exp			231
	notes payable			6000
	discount on notes payable				231
	cash				6000
calculation of interest & obligation
Date	payment	4% interest exp quatrly	red of obligation	net
30-Oct				21779
31-Jan	6000	871	5129	16650
30-Apr	6000	666	5334	11316
31-Jul	6000	453	5547	5769
30-Oct	6000	231	5769
	24000	2221	21779
Balance sheet
PPE machinery			21779
notes payable		24000
discount on notes payable		1640	22360