Question

On January 1, 2019, Nonsuch Corporation sold specialized equipment originally costing $9,500 (Nonsuch had paid 9,500 to buy it as inventory). The market value of the equipment was not readily determinable. Nonsuch sold the equipment to Neverland, Inc. who is going to use it in their operations for 5 years at which time it will have no salvage value.

Nonsuch received a $4,000 down payment from Neverland and will receive five payments of 4,000 made annually (without a stated interest rate) beginning December 31, 2019 (Neverland will pay Nonsuch 5 equal annual installments). The current market rate on notes of a similar nature and risk is 6 percent and will be used for both the buyer and the seller. You will need to use present value to calculate the value of the equipment and the note.

Required:

1. Prepare the entries to record the sale/purchase of the equipment on January 1, 2019 for both Nonsuch and Neverland.

2. Prepare the entries for both Nonsuch and Neverland at the end of 2019 and 2020 if all adjusting entries are made only at the end of the year and straight-line depreciation is used.

Answer 1

Note 1:Computation of value of equipment

Year	PV Factor@6%	Payment	PV
1/1/2019	1	4000	4000.00
31/12/2019	.9433(1/1.06)	4000	3773.20
31/12/2020	.8899((1/1.06)^2)	4000	3559.60
31/12/2021	.8396((1/1.06)^3)	4000	3358.40
31/12/2022	.7921((1/1.06)^4)	4000	3168.40
31/12/2023	.7473((1/1.06)^5)	4000	2989.20

Total Present Value=20848.80 or 20850 rounded off which is the value of the equipment.

Solution to part (a)

Books of Nonsuch

Journal

Date Particulars Amount Amount

01.01.2019 Bank A/c Dr 4000

Debtor for Machinery A/c Dr 16850

To Machinery A/c 9500

To Proft on sale of machinery A/c 11350

(Being machinery sold for 20850 and

downpayment received of 4000)

Books of Never land

Journal

Date Particulars Amount Amount

01.01.2019 Machinery A/c Dr 20850   

To Creditor for Machinery A/c 16850   

To Bank A/c 4000

(Being machinery bought for 20850 and

downpayment made of 4000)

Solution to part (b)

Books of Nonsuch

Journal

Date Particulars Amount Amount

31.01.2019 Debtor for Machinery A/c Dr 1011

To Finance Income A/c 1011

(Being interest charged @6% on 16850)

31.01.2019 Bank A/c Dr 4000

To Debtor for Machinery A/c 4000

(Being downpayment received)

31.01.2020 Debtor for Machinery A/c Dr 832

To Finance Income A/c 832

(Being interest charged @6% on (16850+1011-4000))

31.01.2020 Bank A/c Dr 4000

To Debtor for Machinery A/c 4000

(Being downpayment received)

Books of Neverland

Journal

Date Particulars Amount Amount

31.01.2019 Finance Cost A/c Dr 1011

To Creditor for Machinery A/c 1011

(Being interest charged @6% on 16850)

31.01.2019   Creditor for Machinery A/c Dr 4000

To Bank A/c 4000

(Being downpayment paid)

31.01.2019 Depreciation A/c Dr 4170

To Machinery A/c 4170

(Being depreciation charged 20850/5)

31.01.2020    Finance Cost A/c Dr 832

To Creditor for Machinery A/c 832

(Being interest charged @6% on (16850+1011-4000))

31.01.2020 Creditor for Machinery A/c Dr 4000

To Bank A/c 4000

(Being downpayment paid)

31.01.2020 Depreciation A/c Dr 4170

To Machinery A/c 4170

(Being depreciation charges 20850/5)