Question

Larkspur 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. Larkspur issues a(n) $2,240,000, 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 $448,000 installments due at the end of each year over the life of the note.

(a) Your answer is correct. Prepare the journal entry at the date of purchase. (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS SHOW SOLUTION SHOW ANSWER LINK TO TEXT Attempts: 2 of 3 used

(b) Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Answer Account Titles and Explanation Debit Credit a Equipment Discount on Notes Payable ($2,240,000- $1,614,941) $1,614,941 $625,059 $2,240,000 Notes Payable (To record the purchase of equipment) Value of Equipment PV of $448,000 annuity @ 12% for 5 years Explanations $448,000 x 3.60478 =$1,614,941 Account Titles and Explanation Credit b Debit Interest Expense ($1,614,941 x 12%) Notes Payable $193,793 $448,000 Discount on Notes Payable $193,793 $448,000 Cash (To record the first year's payment and interest)