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Chapter 10: Q15E (page 538)

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

Short Answer

Expert verified
  1. The capitalized value of the equipment is $86,861.85
  2. Interest expense = $5,686.91
  3. Discount on Notes Payable = $4,754.80

Step by step solution

01

Meaning of Non-interest Bearing liabilities

Non-Interest Bearing Liabilities are the sums of money due by a corporation(a debt on the balance sheet, current or non-current)that are not subject to interest or penalties. Non-Interest Bearing Liabilities, for the avoidance of doubt, do not include liabilities linked to deferred taxes, pensions, retirement, or leases.

02

(a) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Equipment

86,861.85

Discount on Notes Payable

18,138.15

Cash

30,000.00

Notes Payable

75,000.00

(To record the purchase of equipment)

Working notes:

Calculation of value of equipment

Equipment=(Installmentamount脳脳PVfactor)+Downpayment=($15,000脳3.79079)+30,000.00=$56,861.85+30,000.00=$86,861.85

Note: PV of $15,000 annuity @ 10% for 5 years

03

(b) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Notes Payable

15,000.00

Interest Expense

5,686.19

Cash

15,000.00

Discount on Notes Payable

5,686.19

(To record the first year payment)

Working notes:

Preparing schedule year-by-year

Year

Note Payment

A

10% Interest

(Balance*10%)

B

Reduction of Principal

(A-B)

Balance

12/31/16

$56,861.85

12/31/17

$15,000.00

$5,686.19

$9,313.81

47,548.04

12/31/18

15,000.00

4,754.80

10,245.20

37,302.84

04

(c) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Notes Payable

15,000.00

Interest Expense

4,754.80

Cash

15,000.00

Discount on Notes Payable

4,754.80

(To record the second year payment)

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Most popular questions from this chapter

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

Marshall Const.

Brigham Mfg. Co.

Fair value of old crane

\( 82,000

Fair value of new crane

\)200,000

Cash paid

118,000

Cash received

118,000

Instructions

  1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
  3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.

Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)42,000 to raze the old buildings and sold salvaged lumber and brick for \(6,300. Legal fees of \)1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost \(1,500, and a liability insurance premium paid during construction was \)900. The contractor鈥檚 charge for construction was \(2,740,000. The company paid the contractor in two installments: \)1,200,000 at the end of 3 months and \(1,540,000 upon completion. Interest costs of \)170,000 were incurred to finance the construction. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.

(Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan鈥�12% interest, payable semiannually, issued December 31, 2016

\)2,000,000

Short-term loan鈥�10% interest, payable monthly, and principal payable at maturity on May 30, 2018

1,400,000

Long-term loan鈥�11% interest, payable on January 1 of

each year. Principal payable on January 1, 2021

1,000,000

Instructions

(Carry all computations to two decimal places.)

(A) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of \(5,200,000, and the weighted-average amount of accumulated expenditures was \)3,600,000. Compute the avoidable interest on this project.

(B) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.

Question: Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets. (a) Land. (b) Machinery and equipment. (c) Buildings
See all solutions

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