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Chapter 14: Q9P (page 762)

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

Short Answer

Expert verified
  1. Capitalized value of machine is $182,500.
  2. Discount amortized on 31 December 2017 totals$10,600.
  3. Discount amortized on 31 December 2018 totals$8,248.
  4. Discount amortized on 31 December 2019 totals$5,708.
  5. Discount amortized on 31 December 2020 totals $2,965.

Step by step solution

01

Definition of Note Payable

Note payable can be defined as the written promise under which the writerpromises to repay the borrowed amount. It is generally reported as a short-term liability.

02

Journal entries on December 31, 2016

Date

Accounts and Explanation

Debit ($)

Credit ($)

31, Dec 2016

Machine

182,500

Discount on notes payable

27,500

Cash

50,000

Note payable

160,000

(To record the purchase of machine against note)

Working note:

Particular

Amount $

Present value of the note payable ($40,000 @ 8% for 4 years) (3.3125)

$132,500

Down payment

$50,000

The capitalized value of the machine

$182,500

Amortization Schedule:

Date

Cash paid

Interest expenses

Amortization

Carrying amount of note

31 Dec 2016

$132,500

31 Dec 2017

$40,000

$10,600

$29,400

$103,100

31 Dec 2018

$40,000

$8,248

$31,752

$71,348

31 Dec 2019

$40,000

$5,708

$34,292

$37,056

31 Dec 2020

$40,000

$2,965

$37,056

$0

03

Journal entries on December 31, 2017

Date

Accounts and Explanation

Debit ($)

Credit ($)

31 Dec 2017

Note payable

$40,000

Cash

$40,000

31 Dec 2017

Interest expenses

$10,600

Discount on notes payable

$10,600

04

Journal entries on December 31, 2018

Date

Accounts and Explanation

Debit ($)

Credit ($)

31 Dec 2018

Note payable

40,000

Cash

40,000

31 Dec 2018

Interest expenses

8,248

Discount on notes payable

8,248

05

Journal entries on December 31, 2019

Date

Accounts and Explanation

Debit ($)

Credit ($)

31 Dec 2019

Note payable

40,000

Cash

40,000

31 Dec 2019

Interest expenses

5,708

Discount on notes payable

5,708

06

Journal entries on December 31, 2020

Date

Accounts and Explanation

Debit ($)

Credit ($)

31 Dec 2019

Note payable

40,000

Cash

40,000

31 Dec 2019

Interest expenses

2,965

Discount on notes payable

2,965

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Most popular questions from this chapter

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company鈥檚 operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita鈥檚 stock.

All of Donald鈥檚 personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won鈥檛 be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company鈥檚 future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita鈥檚 credit rating, and will increase the company鈥檚 reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of 鈥渉is鈥� company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this case?

(c) What would you do if you were Donald?

On January 1, Patterson Inc. issued \(5,000,000, 9% bonds for \)4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report bonds payable of:

(a) \(4,725,500. (c) \)258,050.

(b) \(4,714,500. (d) \)4,745,000

Question: Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debentures bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, convertible bonds, commodity-backed bonds, and deep discount bonds.

(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)
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