Question

PART B (Schedule 2): On January 1, 2013, Border Company purchased a truck that cost $17,000. The company signed a $17,000 notes payable that specified four equal annual payments (at each year-end), each of which includes a repayment of the principal and interest on the unpaid balance at 10% per annum. The company estimates the useful life of 10 years with zero residual value for the truck. Round up to the nearest dollar.

1. Calculate the amount of each equal payment (round to the nearest dollar)

2. Prepare the journal entry to record the purchase of the truck.

3. Prepare the journal entry by the end of 2013.

4. Prepare the journal entry by the end of 2014.

5. What is the beginning balance of total notes payable (including both the Long-term notes payable and the current portion of long-term notes payable) on January 1, 2015?

6. On January 1, 2015 (not January 1, 2013), what is the NPV of the rest two installments under the 10% annual interest rate?

7. Will the interest paid with the first annual payment be more or less than the interest paid with the second annual payment? Explain your answer.

Answer 1

Req 1.
Purchase cost of truck:				17000
Annuity factor for 4 years at 10%				3.1699
Annual payment				5363
Req 2:
Truck equipment Dr.				17000
Notes payable					17000
Req 3:
Depreciation expense- Truck dr.				4250
Accumulated Depreciation- Truck					4250
Interest expense Dr. (17000*10%)				1700
Notes payable Dr.				3663
Cash acsount					5363
Req 4:
Depreciation expense- Truck dr.				4250
Accumulated Depreciation- Truck					4250
Interest expense Dr. (17000-3663*10%)				1334
Notes payable Dr.				4029
Cash acsount					5363
Req 5:
balance on Notes payable in jan2015:
Notes payable				17000
Less: paid in 2013				3663
Lss: Paid in 2014				4029
balance on jan1				9308
Req 6:
NPV of next two instalments:
Annuity factor for 2 years				1.7355
Annual Instalment				5363
Present value of Instalment				9307
Req 7:
the Interest paymen in first instalment is more than second.
This is because of the reason that the in first instalment interest is calaculated on initial balance.
On second instalment, interest is computed on reduced balance of note paybale after first instalment.