Question

Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2021. A&G paid for the conveyor by issuing a $100,000, four-year note that specified 6% interest to be paid on December 31 of each year, and the note is to be repaid at the end of four years. The conveyor was custom-built for A&G, so its cash price was unknown. By comparison with similar transactions it was determined that a reasonable interest rate was 11%.

Required:
1. Prepare the journal entry for A&G’s purchase of the conveyor on January 1, 2021.
2.Prepare an amortization schedule for the four-year term of the note.
3. Prepare the journal entry for A&G’s third interest payment on December 31, 2023.
4.If A&G’s note had been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, what would be the amount of each installment?
5. By considering the installment payment of requirement 4, prepare an amortization schedule for the four-year term of the installment note.
6. Prepare the journal entry for A&G’s third installment payment on December 31, 2023.

Answer 1

1. Conveyor Account Debited----------------------------------------------------------------------------$100000

Braxton Technologies Account/Note Payable Credited----------------------------------------$100000

2. Amortization Schedule

  Year Payment   Principal Paid Interest   Remaining Balance

31.12.2021 $31000 $25000 $6000 $75000

31.12.2022 $29500 $25000 $4500 $50000

31.12.2023 $28000 $25000 $3000 $27225.61

31.12.2024 $26500 $25000 $1500 $0.0

3. Interest Expense Account Debit-------------------------------------------------$3000

   Interest Payable Account Credited----------------------------------------------$3000

Interest Payable Account Debited-----------------------------------------------$3000

Bank Account Credited-------------------------------------------------------------$3000

4.Amount of each installment- $28859.15

5. Amortization Schedule

  Year     Payment   Principal Paid Interest   Remaining Balance

31.12.2021 $28859.15 $22859.15 $6000 $77140385

31.12.2022 $28859.15 $24230.70   $4628.45 $52910.15

31.12.2023 $28859.15 $25684.54 $3174.61 $27225.61

31.12.2024 $28859.15 $27225.61 $1633.54 $0.0

6. Interest Payable Account Debited-----------------------------------------------------------------$3174.61

  Braxton Technologies Account/Note Payable Debited----------------------------------------$25684.54

Bank Account Credited--------------------------------------------------------------------------------$27225.61