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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: (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of \(10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

  1. Geddes paid cash for the equipment 8 days after the purchase. The vendor鈥檚 credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
  2. Geddes traded in equipment with a book value of \)2,000 (initial cost \(8,000), and paid \)9,500 in cash one month after the purchase. The old equipment could have been sold for \(400 at the date of trade. (The exchange has commercial substance.)
  3. Geddes gave the vendor a \)10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.

Instructions

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

(Capitalization of Interest) On December 31, 2016, Main Inc. borrowed \(3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, \)360,000; June 1, \(600,000; July 1, \)1,500,000; December 1, \(1,500,000. The building was completed in February 2018. Additional information is provided as follows.

1. Other debt outstanding

10-year, 13% bond, December 31, 2010, interest payable annually \)4,000,000

6-year, 10% note, dated December 31, 2014, interest payable

annually \(1,600,000

2. March 1, 2017, expenditure included land costs of \)150,000

3. Interest revenue earned in 2017 $49,000

Instructions

(a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense at December 31, 2017.

Question: Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.

(Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde鈥檚 asset is referred to below as 鈥淎sset A,鈥� and Wiggins鈥� is referred to as 鈥淎sset B.鈥� The following facts pertain to these assets.

Asset A

Asset B

Original cost

\(96,000

\)110,000

Accumulated depreciation (to date of exchange)

40,000

47,000

Fair value at date of exchange

60,000

75,000

Cash paid by Hyde, Inc.

15,000

Cash received by Wiggins, Inc.

15,000

Instructions

  1. Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
  2. Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.

Question: Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?
See all solutions

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