Question

Exercise 10-14

Swifty 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. Swifty 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.

1. 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.)

2. 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.)

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

4. 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.) (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.)

Answer 1

Please find below table useful to compute desired results: -

2240000 Issuing Zero note for Note life Installment Market rate of Interest Assumed life of Equipment =C1/C2 =12/100 10 Credit =C1 Journal General 8 Sr. No. Account Titles and Explanation Debit Equipment =C3*(1-(1+C4) -C2)/C4 Discount on Notes Payable =D11-09 Notes Payable (to record Equipment purchased) Notes payable =C3 Interest Expense =C9*C4 Cash Discount on Notes Payable (to record first installment paid) Notes Payable =C3 Interest Expense 1=(C9-C18-C14)*C4 Cash Discount on Notes Payable (to record second installment Paid) Depreciation Expense =C9/C5 Accumulated Depreciation (to record Depreciation) =C13 =C14 1=C18 =C19 =C23

End results would be as follows: -

2.240,000.00 Issuing Zero note for Note life Installment Market rate of Interest Assumed life of Equipment 448,000.00 12% 10 Credit 10 2,240,000.00 Journal General Sr. No. Account Titles and Explanation Debit Equipment 1,614,939.74 Discount on Notes Payable 625,060.26 Notes Payable (to record Equipment purchased) Notes payable 448,000.00 Interest Expense 193,792.77 Cash Discount on Notes Payable (to record first installment paid) Notes Payable 448,000.00 Interest Expense 116.777.64 Cash Discount on Notes Payable (to record second installment Paid) Depreciation Expense 161.493.97 Accumulated Depreciation (to record Depreciation) 448,000.00 193,792.77 448,000.00 116,777.64 161,493.97