Question

At January 1, 2021, Brant Cargo acquired equipment by issuing a five-year, $175,000 (payable at maturity), 5% note. The market rate of interest for notes of similar risk is 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. to 3. Prepare the necessary journal entries for Brant Cargo. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Round your final answers to the nearest whole dollar)

1. Record the purchase of equipment 1/1/2021

2. Record the interest expense 12/31/2021

3. Record the interest expense 12/31/2022

Answer 1

	Date	Account title and explanation	Debit	Credit
1	1/1/2021	Equipment	$141,830
		Discount on notes payable	$33,170
		Notes payable		$175,000
		[To recod purchase of equipment]
2	12/31/2021	Interest expense [$141,830*10%]	$14,183
		Discount on notes payable		$5,433
		Cash [$175,000*5%]		$8,750
		[To record interest expense]
3	12/31/2022	Interest expense [($141,830+$14,183)*10%]	$14,726
		Discount on notes payable		$5,976
		Cash [$175,000*5%]		$8,750
		[To record interest expense]

Calculations:

Cash interest = $175,000 x 5% = $8,750
Present value of cash interest	$33,169
[$8,750 x 3.79079 PV annuity of $1 (10%, 5 years)]
Present value of face value	$108,661
[$175,000 x 0.62092 PV of $1 (10%, 5 years)]
Present value of note	$141,830

Interest amortization schedule (partial):

	Cash interest	Interest expense @ 10%	Disc. Amortized	Carrying amount
1/1/2021				$141,830
12/31/2021	8750	$14,183	$5,433	$147,263
12/31/2022	8750	$14,726	$5,976	$153,239