Question

At January 1, 2018, Brant Cargo acquired equipment by issuing a six-year, $200,000 (payable at maturity), 5% note. The market rate of interest for notes of similar risk is 10%.

Prepare necessary journal entries:

1. On Jan 1, 2018

2. On Dec 31, 2018

3. On Dec 31, 2019

Answer 1

SOLUTION

Journal entries-

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
Jan 1, 2018	Equipment	156,452
	Discount on notes payable	43,548
	Notes payable		200,000
	(To record purchase of equipment)
Dec 31, 2018	Interest expense	15,645
	Discount on notes payable		5,645
	Cash		10,000
	(To record the interest at Dec.31,2018)
Dec 31, 2019	Interest expenes	16,210
	Discount on notes payable		6,210
	Cash		10,000
	(To record the interest at Dec.31,2019)

Working notes-

1. Interest = $200,000*5% = $10,000 per year

n=6, i=10%

Interest PV ordinary annuity = $10,000 * 4.3552 = $43,552

Principal = $200,000 * 0.5645 = $112,900

Equipment = $43,552 + $112,900 = $156,452

2. Cash payment $10,000

Interest - $156,452 * 10% = $15,645

Discount = $15,645 - $10,000 = $5,645

value = $156,452 + $5,645 = $162,097

3. Cash payment = $10,000

Interest = $162,097*10% = $16,210

Discount = $16,210 - $10,000 = $6,210