Question

1. On January 1, 2019, Rubin Co. issued a 3-year non-interest-bearing note of $250,000 in exchange for a custom-made machine for which there is no obvious market value. The appropriate discount rate is 5%. Prepare the journal entry to purchase this machine.

2. Looking at the transaction above, how much interest expense would be recorded in 2019 by Rubin Co.?

Answer 1

a.	Journal entry to purchase the machine:
	Date	Account titles and Explanation	Debit	Credit
	January 1, 2019	Machine	$ 2,15,959.40
		Notes Payable		$ 2,15,959.40
		(To record the purchase of machine)
	Working:
Purchase price of machine will be present value of notes payable in 3 years.
Present value of 1	=	(1+i)^-n	Where,
	=	(1+0.05)^-3	i	=	5%
	=	0.863837599	n	=	3
Present value of notes	=	Notes payable in 3 years	*	Present value of 1
	=	$ 2,50,000.00	*	0.863837599
	=	$ 2,15,959.40
b.	Interest expense in 2019	$ 10,797.97
Working:
Notes amortization Schedule:
Year	Beginning Notes Payable	Interest Expense	Ending Notes Payable
	a	b=a*5%	c=a+b
1	$        2,15,959.40	$ 10,797.97	$ 2,26,757.37
2	$        2,26,757.37	$ 11,337.87	$ 2,38,095.24
3	$        2,38,095.24	$ 11,904.76	$ 2,50,000.00