Question

On October 30, 2019, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%. Required: 1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used. 2. Show how the preceding items would be reported on the December 31, 2019, balance sheet.

Answer 1

the present value of the note payable:

PV = payment x {1 - [1 / (1 + r)ⁿ]} / r

payment = $6,000

r = 16% / 4 = 4%

n = 4

PV = $6,000 x {1 - [1 / (1 + 0.04)⁴]} / 0.04 = $21,779.37 ≈ $21,779

October 30, 2019, machinery purchased

Dr Machinery 21,779

Dr Discount on notes payable 2,221

Cr Notes payable 24,000

Using the straight amortization method, the interest expense will be $555.25 per payment.

December 31, 2019, accrued interest on notes payable

Dr Interest expense 370

Cr Interest payable 370

January 31, 2020

Dr Interest payable 370

Dr Interest expense 185.25

Dr Note payable 6,000

Cr Discount on notes payable 555.25

Cr Cash 6,000

April 30, 2020

Dr Interest expense 555.25

Dr Note payable 6,000

Cr Discount on notes payable 555.25

Cr Cash 6,000

July 31, 2020

Dr Interest expense 555.25

Dr Note payable 6,000

Cr Discount on notes payable 555.25

Cr Cash 6,000

October 31, 2020

Dr Interest expense 555.25

Dr Note payable 6,000

Cr Discount on notes payable 555.25

Cr Cash 6,000

On the December 31, 2019 balance sheet, the accounts should show:

Assets:

Machinery $21,779

Liabilities:

Note payable 24,000

Discount on notes payable ($2,221)

Interest payable $370

Retained earnings ($370)