Question

John Company purchases used equipment form Moore Inc. on January 1, 2018 issuing a zero-interest note for $4,000,000 that matures in 4 years. The market value of the equipment is not readily available. John Company’s normal borrowing rate is 8%:

a. Record the journal entries at January 1, 2018 (at purchase), the interest entry (if necessary) for each year until maturity of the note and the entry to record the maturity of the note.

Answer 1

	PV of the note = 4000000/1.08^4 =	$ 29,40,119
a)
Jan 1, 2018	Equipment	$ 29,40,119
	Discount on notes payable	$ 10,59,881
	Notes payable		$   40,00,000
	[To record purchase of equipment and issue of note payable]
Dec 31, 2018	Interest expense (2940119*8%)	$    2,35,210
	Discount on notes payable		$     2,35,210
Dec 31, 2019	Interest expense (2940119+235210)*8%	$    2,54,026
	Discount on notes payable		$     2,54,026
Dec 31, 2020	Interest expense (2940119+235210+254026)*8%	$    2,74,348
	Discount on notes payable		$     2,74,348
Dec 31, 2021	Interest expense (2940119+235210+254026+274348)*8%	$    2,96,296
	Discount on notes payable		$     2,96,296
	Notes payable	$ 40,00,000
	Cash		$   40,00,000