Question

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 $150,000, 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%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

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.

Answer 1

The present value of $150,000 and the interest to be paid during the foour year is the value of the equipment bought on January 1, 2021
Discount factor of 12% for 4 years =	3.037
Discount factor of 12% at 4th years =	0.6355
Discounted value of $150,000  as on January 1, 2021=	95,327.71
Discounted value of $7500(150,000*5%) as on January 1, 2021=	22,780.12
Value of the equipment	1,18,107.83

	Journal Entry
Date	Particulars	Debit	Credit
01/01/21	Equipment Dr	1,18,107.83
	Discount on Notes payable	31,892.17
	To Notes Payable		150000
	(Purchase of equipment, calculation given above)

	Amortization schedule for the four-year term of the note
Date	Opening Balance	Cash Payment - interest (150000*5%)	Effective Interest @ 12 %	Increase in balance	Balance outstanding
		A	B = opening blance * 12%	C=B-A	D=Opening balance + C
31/12/21	1,18,107.83	7500	14,172.94	6,672.94	1,24,780.77
31/12/22	1,24,780.77	7500	14,973.69	7,473.69	1,32,254.46
31/12/23	1,32,254.46	7500	15,870.54	8,370.54	1,40,625.00
31/12/24	1,40,625.00	7500	16,875.00	9,375.00	1,50,000.00
	Total	30000	61892.1681

Date	Particulars	Debit	Credit
	journal entry for A&G’s third interest payment on December 31, 2023.
31/12/23	Interest expense Dr	15,870.54
	Discount on notes payable (difference)		8,370.54
	Cash		7500

	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, amount of each installment	Amount
	Installment Payment = present value of notes - PVOA(4,12%)	3.0373
	Installment Payment = $118,107.83/3.0373	38,885.17

	Amortization schedule for the four-year term of the installment note.
Date	Opening Balance	Cash Payment - interest (150000*5%)	Effective Interest	Balance repaid	Balance outstanding
		A	B = opening blance * 12%	C=B-A	D=Opening balance + C
31/12/21	1,18,107.83	38,885.17	14,172.94	24,712.23	93,395.61
31/12/22	93,395.61	38,885.17	11,207.47	27,677.69	65,717.91
31/12/23	65,717.91	38,885.17	7,886.15	30,999.02	34,718.90
31/12/24	34,718.90	38,885.17	4,166.27	34,718.90	-
	Total	155540.6618	37432.8299

Date	journal entry for A&G’s third installment payment on December 31, 2023.	Debit	Credit
31/12/23	Notes Payable Dr	30,999.02
	Interest expenses Dr	7,886.15
	To Cash		38,885.17