Question

Reforged purchased equipment on January 2, 2019. They issued a $500,000, five-year, non-interest bearing note to C9 Equipment for the new equipment when the market rate of interest for similar transactions was 8%. The company will pay of the note in five $100,000 installments that are due at the end of each year over the life of the note.

Needed:

a) Prepare an effective interest amortization table for the note for the five-year period.

b) Prepare the entries for the purchase.

c) Prepare the entry for at the end of the first year to record the payment.

Answer 1

Solution a:

Present value of note = $100,000 * Cumulative PV factor at 8% for 5 periods

= $100,000 * 3.99271 = $399,271

Note Amortization Schedule
Date	Cash paid	Interest expense	Decrease in carrying value	Carrying value
2-Jan-19				$399,271
31-Dec-19	$100,000	$31,942	$68,058	$331,213
31-Dec-20	$100,000	$26,497	$73,503	$257,710
31-Dec-21	$100,000	$20,617	$79,383	$178,326
31-Dec-22	$100,000	$14,266	$85,734	$92,593
31-Dec-23	$100,000	$7,407	$92,593	$0

Solution b:

Journal Entries - Reforged
Event	Particulars	Debit	Credit
2-Jan-19	Equipment Dr	$399,271.00
	Discount on notes payable Dr	$100,729.00
	To Notes payable		$500,000.00
	(To record purchase of equipment)

Solution c:

Journal Entries - Reforged
Event	Particulars	Debit	Credit
31-Dec-19	Interest expense Dr	$31,942.00
	Notes payable Dr	$100,000.00
	To Discount on notes payable		$31,942.00
	To Cash		$100,000.00
	(To record note payment)