Question

Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2018. A&G paid for the conveyor by issuing a $100,000, four-year note that specified 4% interest to be paid on December 31 of each year, and the note is to be repaid at the end of four years. The conveyor was custom-built for A&G, so its cash price was unknown. By comparison with similar transactions it was determined that a reasonable interest rate was 12%. (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. Prepare the journal entry for A&G’s purchase of the conveyor on January 1, 2018.
2. Prepare an amortization schedule for the four-year term of the note.
3. Prepare the journal entry for A&G’s third interest payment on December 31, 2020.
4. If A&G’s note had been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, what would be the amount of each installment?
5. By considering the installment payment of required 4. Prepare an amortization schedule for the four-year term of the installment note.
6. Prepare the journal entry for A&G’s third installment payment on December 31, 2020.

Answer 1

1	Prepare a journal entry for A&G purchase of the conveyor on january 1 2018
	Date	General journal	Debit	credit
	Jan-01	equipment	75700
		Discount on notes payable	24300
		Notes Payable		100000
		Interest : 4000 *3.0373	12150
		Principal: 100000*0.6355	63550
			75700
2	Prepare an amortization schedule for the four year term of the note
	YEAR	CASH PAYMENT	effective Balance	Increase in Balance	Outstanding Balance
					75700
	2018	4000	9084	5084	80784
	2019	4000	9694	5694	86478
	2020	4000	10377	6377	92855
	2021	4000	11145	7145	100000
3	Prepare a journal entry for A & G Third interest Payment on december 31 2020
	Date	General journal	Debit	credit
	Dec 31 2020	Interest expense	10377
		Discount on notes Payable		6377
		Cash		4000
4	IF A& G note had been an installment note to be paid in four equal installments
		Installment Payment	24923.45
		(75700/3.0373)
5	Prepare an amortization schedule for four year term of the installment note
	YEAR	CASH PAYMENT	effective Balance	Decrease in Balance	Outstanding Balance
					75700
	2018	24923.45	9084	15839	59861
	2019	24923.45	7183	17740	42120
	2020	24923.45	5056	19867	22253
	2021	24923.45	2670	22253	0
6	Prepare the journal entry for A&G Third installment payment on december 31 2020
	Date	General journal	Debit	credit
	Dec 31 2020	Interest expense	19867
		Notes Payable	5056
		Cash		24923