Question

Chippewas inc has decided to purchase equipment from central Michigan industries on January 2, 2017, to expand its production capacity to meet customers demand for its product. Chippewas issues an $800000, 5 year, zero interest bearing note to central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160000 installments due at the end of each year over the life of the note.

Answer 1

Year	Payment	Discount factor @ 12%	Present value
1	160,000	0.892857	142,857
2	160,000	0.797194	127,551
3	160,000	0.711780	113,885
4	160,000	0.635518	101,683
5	160,000	0.567427	90,788
Present value of Note			$        576,764
Discount on notes payable (800000-576764)			$        223,236

Year	Opening value of Note	Installment paid	Interest expense	Principal Paid	Closing value of Note	Discount on notes payable
Jan 2, 2017					576,764	223,236
Dec 31, 2017	576,764	160,000	69,212	90,788	485,976	154,024
Dec 31, 2018	485,976	160,000	58,317	101,683	384,293	95,707
Dec 31, 2019	384,293	160,000	46,115	113,885	270,408	49,592
Dec 31, 2020	270,408	160,000	32,449	127,551	142,857	17,143
Dec 31, 2021	142,857	160,000	17,143	142,857	-	0
How to calculate the above number?
Interest expense = Opening value of Note * 12%
Principal Paid = Installment paid - Interest expense
Closing value of Note = Opening value of Note - Installment paid
Discount on notes payable = Discount on notes payable for the earlier period - Interest expense

General entries
Transaction	General Journal	Debit	Credit
Jan 2, 2017	Equipment	576,764
	Discount on notes payable	223,236
	Notes payable		800,000
	(To record purchase of equipment on notes payable.)
Dec 31, 2017	Note payable	160,000
	Interest expense	69,212
	Discount on notes payable		69,212
	Cash		160,000
	(To record interest expense on zero interest bearing note and installment paid.)
Dec 31, 2018	Note payable	160,000
	Interest expense	58,317
	Discount on notes payable		58,317
	Cash		160,000
	(To record interest expense on zero interest bearing note and installment paid.)
Dec 31, 2019	Note payable	160,000
	Interest expense	46,115
	Discount on notes payable		46,115
	Cash		160,000
	(To record interest expense on zero interest bearing note and installment paid.)
Dec 31, 2020	Note payable	160,000
	Interest expense	32,449
	Discount on notes payable		32,449
	Cash		160,000
	(To record interest expense on zero interest bearing note and installment paid.)
Dec 31, 2021	Note payable	160,000
	Interest expense	17,143
	Discount on notes payable		17,143
	Cash		160,000
	(To record interest expense on zero interest bearing note and installment paid.)