Question
In: Accounting
Cobalt Ceramics, Inc., acquired a manufacturing facility (building) from Nickel Construction Company. Nickel completed construction of...
Cobalt Ceramics, Inc., acquired a manufacturing facility (building) from Nickel Construction Company. Nickel completed construction of the facility on January 1, 2021. In payment for the $6 million lighthouse, Cobalt issued a five-year installment note to be paid in five equal payments at the end of each year. The payments include interest at the rate of 5.4%.
Instructions
- Prepare the journal entry for Cobalt’s purchase of the facility on January 1, 2021.
- Prepare the journal entry for the first installment payment on December 31, 2021.
- Prepare the journal entry for the second installment payment on December 31, 2022.
- What amount will Cobalt report as Notes Payable on its December 31, 2022 balance sheet?
Solutions
Expert Solution
| Notes payable | 60,00,000 | |||||
| Divide: Annuity PVF at 5.40% for 5 years | 4.28202 | |||||
| Annual Instalment | 1401207.84 | |||||
| Amort Chart | ||||||
| Date | Payment | Interest | Principal | Carrying | ||
| expense | payment | amount of notes | ||||
| 01.01.21 | 60,00,000 | |||||
| 31.12.21 | 1401208 | 324000 | 1077208 | 49,22,792 | ||
| 31.12.22 | 1401208 | 265831 | 1135377 | 37,87,415 | ||
| Journal entries | ||||||
| S.no. | Accounts title and explanations | Debit $ | Credit $ | |||
| 01.01.21 | Plant and equipment | 60,00,000 | ||||
| Notes payable | 60,00,000 | |||||
| (for purchase of plant for notes) | ||||||
| 31.12.21 | Notes payable | 10,77,208 | ||||
| Interest expense | 3,24,000 | |||||
| Cash | 14,01,208 | |||||
| (for instalment paid) | ||||||
| 31.12.22 | Notes payable | 11,35,377 | ||||
| Interest expense | 2,65,831 | |||||
| Cash | 14,01,208 | |||||
| (for instalment paid) | ||||||
| Balance Sheet (31.12.22) | ||||||
| Notes payable | 37,87,415 | |||||
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