Question

Exercise 10-14 (Part Level Submission)Pronghorn Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2020, to expand its production capacity to meet customers’ demand for its product. Pronghorn issues a(n) $1,280,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $256,000 installments due at the end of each year over the life of the note.Prepare the journal entry at the date of purchase

Answer 1

Dr Equiqment $922,823

Cr Note Payables $922,823

(to record the purchase of Equipment by issuance of note)

Step-by-step explanation:

As we purchase the Equiment in terms of issuing Note payable in the next 5 years, at the date of purchase, the Asset side will increase ( shown with a Debit) and the Liability side will also increase ( shown with a Credit entry).

Besides deciding which Accounts will be adjusted by the transaction, we still have to find the book value of the Equiqment to determine how much the these accounts will be adjusted.

In this case, the Equipment's booked value is equal to the present value of the annuity made through five equal installment annually which is discounted at the market rate 12% applied to the same kind of Note.

Thus we have:

Equipment's book value = (256K / 12%) x [ 1 - (1+ 12%)(^-5) = $ 922,823