Question

The company purchased a piece of equipment. Terms of the purchase were as follows: $10,000 in cash immediately, followed by note payments of $20,000 at the end of each year for the next eight years. The market rate of interest is 9%.

1. Make the journal entry necessary to record the initial purchase. Round all answers to the nearest whole dollar. Click here to access the PV table to use with this problem. If an amount box does not require an entry, leave it blank.

2. Make the journal entries necessary to record the first cash payment of $20,000 at the end of the first year. Round your answers to the nearest whole dollar.

Answer 1

CALCULATION OF VALUE OF EQUIPMENT PURCHASED
YEAR	NOTE PAYMENT		PV@9%	PRESENT VALUE
1	20000		0.917	$                       18,340
2	20000		0.842	$                       16,840
3	20000		0.772	$                       15,440
4	20000		0.708	$                       14,160
5	20000		0.650	$                       13,000
6	20000		0.596	$                       11,920
7	20000		0.547	$                       10,940
8	20000		0.502	$                       10,040
TOTAL PV OF ALL NOTE PAYMENTS				$                     110,680
ADD: DOWN PAYMENT MADE				$                       10,000
PURCHASE PRICE OF EQUIPMENT				$                     120,680
JOURNAL ENTRY AT THE TIME OF PURCHASE
DATE	PARTICULAR	L.F.	AMOUNT DR	AMOUNT CR
	EQUIPEMENT A/C……                                                DR		$             110,680
	TO PAYABLE A/C			$                     110,680
	(BEING EQUIPEMENT PURCHASED ON INSTALLMENT)
	PAYABLE A/C                                                                DR		$                10,000
	TO BANK A/C			$                       10,000
	(BEING INITIAL PAYMENT MADE FOR EQUIPMENT PURCHASED)
JOURNAL ENTRY AT THE TIME OF FIRST PAYMEN
DATE	PARTICULAR	L.F.	AMOUNT DR	AMOUNT CR
	INTEREST ON NOTE A/C ……                                                                        DR		$                  9,961
	TO PAYABLE A/C			$                         9,961
	(BEING INTERSES ON NOTE PAYABLE RECORDED)
	PAYABLEA/C                                                                DR		$                20,000
	TO BANK A/C			$                       20,000
	(BEING FIRST INSTALMEN PAID FOR EQUIPMENT PURCHASED)