Question

Tamarisk 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. Tamarisk issues a(n) $1,440,000, 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 $288,000 installments due at the end of each year over the life of the note.

(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.)

A) 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.

B) Prepare the journal entry at the end of the second year to record the payment and interest.

C) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Answer 1

PV factor	3.60478	=(1-(1.12)^-5)/0.12
Equipment to be recorded	1038177	=288000*3.60478
A
	Debit	Credit
Notes Payable	288000
Interest Expense	124581		=1038177*12%
Cash		288000
Discount on Notes Payable		124581
B
	Debit	Credit
Notes Payable	288000
Interest Expense	104971		=(1038177-288000+124581)*12%
Cash		288000
Discount on Notes Payable		104971
C
	Debit	Credit
Depreciation expense	207635		=1038177/5
Accumulated Depreciation-Equipment		207635