Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter C, Problem 2PA
Recording Equipment Purchase with Two-Year Note
Peabody Corporation purchased equipment and in exchange signed a three-year promissory note. The note requires Peabody to make a single payment of $20,000 in three years. Peabody has other promissory notes that charge interest at the annual rate of 6 percent.
Required:
- 1. Compute the present value of the note, rounded to the nearest dollar, using Peabody’s typical interest rate of 6 percent.
- 2. Show the
journal entry to record the equipment purchase (round to the nearest dollar). - 3. Show the
adjusting journal entry at the end of the first year to record interest on the note. - 4. Show the adjusting journal entry at the end of the second year to record interest on the note.
- 5. Show the adjusting journal entry at the end of the third year to record interest on the note (but do not record the payment of $20,000 yet).
- 6. Show the journal entry at the end of the third year to record the payment of $20,000.
1.
Expert Solution
To determine
To Compute: The present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%.
Answer to Problem 2PA
The present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%, is $16,792.
Explanation of Solution
Present value is the amount of future value reduced or discounted at a rate of interest till particular current date.
Formula to compute present value of single payment with tables:
Compute the present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%.
2.
Expert Solution
To determine
To Journalize: An entry to record the purchase of the equipment, rounded to the nearest dollar.
Answer to Problem 2PA
The journal entry to record the purchase of equipment is shown below.
| Date | Account Title | Debit ($) | Credit ($) |
| Equipment | $16,792 | ||
| Notes payable | $16,792 | ||
| (To record the purchase of equipment) |
Table (1)
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
3.
Expert Solution
To determine
To Journalize: An adjusting entry to record the interest on the note at the end of the first year.
Answer to Problem 2PA
The adjusting entry to record the interest on the note at the end of the first year is shown below.
| Date | Account Title | Debit ($) | Credit ($) |
| Interest Expense | $1,008 | ||
| Notes payable | $1,008 | ||
| (To record the interest on notes payable) |
Table (2)
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Working Notes:
Calculate the interest on the notes payable:
4.
Expert Solution
To determine
To Journalize: An adjusting entry to record the interest on the note at the end of the second year.
Answer to Problem 2PA
The adjusting entry to record the interest on the note at the end of the second year is shown below.
| Date | Account Title | Debit ($) | Credit ($) |
| Interest Expense | $1,068 | ||
| Notes payable | $1,068 | ||
| (To record the interest on notes payable) |
Table (3)
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Working Notes:
Calculate the interest on the notes payable:
5.
Expert Solution
To determine
To Journalize: An adjusting entry to record the interest on the note at the end of the third year.
Answer to Problem 2PA
The adjusting entry to record the interest on the note at the end of the third year is shown below.
| Date | Account Title | Debit ($) | Credit ($) |
| Interest Expense | $1,132 | ||
| Notes payable | $1,132 | ||
| (To record the interest on notes payable) |
Table (4)
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Working Notes:
Calculate the interest on the notes payable:
6.
Expert Solution
To determine
To Journalize: An entry to record the payment for the equipment, rounded to the nearest dollar.
Answer to Problem 2PA
The journal entry to record the payment for equipment is shown below.
| Date | Account Title | Debit ($) | Credit ($) |
| Notes payable | $20,000 | ||
| Cash | $20,000 | ||
| (To record the payment on notes payable) |
Table (5)
Explanation of Solution
Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
- Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
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Students have asked these similar questions
Problem #2: Installment Note
Preferred Corporation purchases an asset and finances it with a note payable. Information regarding the transaction follows:
YOU WILL NÉED THE KIESO PRESENT VALUE TABLES FOR THIS PROBLEM.
Cost of asset
450,000
450,000
12%
years
times per year
Amount Financed
Annual Interest Rate
Installment loan term
Payments are made
USE PROBLEM #2 TO ANSWER QUESTIONS 8 THRU 10 BELOW
8.) Calculate the periodic payment on the note payable.
9.) What is the total amount of interest that will be paid on the note payable over the two year period?
10.) If the company wishes to get the loan paid off in ONE year instead what will the new quarterly payments be?
A one year note payable is issued by a bank to ABC company to purchase a photocopy
machine valued at $7,000. The amount owing to the bank for the note must be paid back
in one year. Hence, this is a short-term note payable. The interest rate charged by the
bank is 12%. Interest charged on the note is included in the payment of $10,000 to be
paid to the bank at the end of the year.
Required:
(a) Calculate the present value of the note (PV).
(a)
(b) Record the journal entry:
i. on the day the asset is purchased
General Journal
POST
DATE ACCOUNT TITLE AND EXPLANATION REF DEBIT CREDIT
ii. on the day the note payable is paid back to the bank.
General Journal
POST
DATE ACCOUNT TITLE AND EXPLANATION REF. DEBIT CREDIT
AND E
Canvas Problem: Long-Term Notes Payable
XYZ, Inc. has purchased new equipment. The
contract with the manufacturer requires XYZ to make
a $10,000 down payment and to sign a note to pay
$50,000 per year at the end of each of the next 6
years at an annual interest rate of 8%. Each equal
payment of $50,000 includes principal and interest
on the unpaid balance.
Instructions: Answer the following questions.
a. At what amount should XYZ record the
equipment on the date of acquisition? Use the
present value tables and Excel.
b. Prepare the journal entry to record the
equipment purchase.
c. Prepare the journal entries to record the
payments XYZ makes at the end of the first and
the end of the second year.
Chapter C Solutions
Fundamentals Of Financial Accounting
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