Question

I need help answering this question, Crane Inc. decided to purchase equipment from Central Ontario Industries on January 2, 2020, to expand its production capacity to meet customers’ demand for its product. Crane issued a $880,000, 4-year, non–interest-bearing note to Central Ontario for the new equipment when the prevailing market interest rate for obligations of this nature was 11%. The company will pay off the note in 4 $220,000 instalments due at the end of each year of the note’s life. (The tables in this problem are to be used as a reference for this problem.)

Answer 1

Calculation of Present value of Notes payable 11 12. Amount of Installment of Notes Payable Present Value of annuity@11% for 4 years Present Value of Notes payable 220,000 13 3.10245 14 682,539 15 16 Account Title & explanation Debit Credit 17 Equipment 682,539 18 Notes Payable 682,539 19 20 (b) repare th e journa I entryies ) a t th e en d of the firs t yea rtoreco rd the paymen t and inte r est, assuming 21 that the company employs the ef fective-inte rest method. 22 Year Cash payment Interest expense@11% Reduction of Balance 23 Principal 24 1/2/2020 682,539 537,618 376,756 25 26 12/31/2020 220000 75,079 59,138 144,921 160,862 220000 27 12/31/2021 28 Account Title & explanation Credit Date Debit 30 12/31/2020 Notes payable Interest expense 144,921 75,079 31 220,000 Cash 32 33 34 29

35 c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest. 36 Debit Credit Date Account Title & explanation 37 38 12/31/2020 Notes payable Interest expense Cash 160,862 59,138 39 160,000 40 41 d) Assuming that the equipment had a 8-year life and no salvage value, prepa re the journal entry 42 necessary to r eco rd dep r eciation in the first yea r. (Straight-line dep r eciation is employed.) 43 44 Title & explanation Асcoun Debit Credit 45 Depreciation Expense 85,317 46 Accumulated Depreciation 85,317 47 48 49 50