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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

Previn Brothers Inc. purchased land at a price of \(27,000. Closing costs were \)1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?

(Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.

Instructions

For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.

  1. __________ Improvement.
  2. __________ Replacement of a minor broken part on a machine.
  3. __________ Expenditure that increases the useful life of an existing asset.
  4. __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
  5. __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset鈥檚 salvage value.
  6. __________ Expenditure that increases the quality of the output of the productive asset.
  7. __________ Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine鈥檚 useful life.
  8. __________ Ordinary repairs.

Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation. Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under long-term payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.

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: Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney鈥檚 fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.
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