Question

Shamrock Cosmetics Co. purchased machinery on December 31, 2016, paying $45,000 down and agreeing to pay the balance in four equal installments of $45,600 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Prepare the journal entries that would be recorded for the purchase and for (1) the payments and (2) interest on the following dates. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(a)		December 31, 2016.
(b)		December 31, 2017.
(c)		December 31, 2018.
(d)		December 31, 2019.
(e)		December 31, 2020.

Answer 1

Cost of asset:

Particulars	Amount	Discount factor	Present value
Down payment	45,000	1	45,000
Annual payment	45,600	3.3121	151,033
Cost of asset			196,033

Loan amortisation schedule:

Year ending	Opening liability	Interest	Payment	Closing liability
2016				151,033
2017	151,033	12,083	(45,600)	117,516
2018	117,516	9,401	(45,600)	81,317
2019	81,317	6,505	(45,600)	42,222
2020	42,222	3,378	(45,600)	0

Journal:

Date	Account	Debit	Credit
Dec 31, 2016	Machinery	196,033
	Cash		45,000
	Note payable		151,033
Dec 31, 2017	Interest expense	12,083
	Note payable	33,517
	Cash		45,600
Dec 31, 2018	Interest expense	9,401
	Note payable	36,199
	Cash		45,600
Dec 31, 2019	Interest expense	6,505
	Note payable	39,095
	Cash		45,600
Dec 31, 2020	Interest expense	3,378
	Note payable	42,222
	Cash		45,600