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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

Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of \(350,000 at the time of purchase. A \)550,000, zero-interest-bearing note due January 1, 2020, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%. Determine at what amount the land should be recorded at January 1, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.

E14-2 (L01) (Classification) The following items are found in the financial statements.

(a) Discount on bonds payable.

(b) Interest expense (credit balance).

(c) Unamortized bond issue costs.

(d) Gain on repurchase of debt.

(e) Mortgage payable (payable in equal amounts over next 3 years).

(f) Debenture bonds payable (maturing in 5 years).

(g) Notes payable (due in 4 years).

(h) Premium on bonds payable.

(i) Bonds payable (due in 3 years).

Instructions

Indicate how each of these items should be classified in the financial statements.

On January 1, 2017, Ellen Carter Company makes the two following acquisitions.

  1. Purchases land having a fair value of \(200,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of \)337,012.
  2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $250,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank

Instructions

(Round answers to the nearest cent.)

  1. Record the two journal entries that should be recorded by Ellen Carter Company for the two purchases on January 1, 2017.
  2. Record the interest at the end of the first year on both notes using the effective-interest method.

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees鈥� wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers鈥� accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?
See all solutions

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