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 7% 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 12%. (FV of $1, PV of $1. FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 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)
Date	Account Titles and Explanation	Debit	Credit
01-Jan-21	Equipment (price determined below)	$ 84,813.45
	Discount on notes payable (difference)	$ 15,186.55
	Notes payable (face amount)		$ 1,00,000.00
Interest	$100000 x 7% x PVOA(4, 12%) = $7000 x 3.03735	$ 21,261.45
Principal	$100000 x PV(4,12%) = 100000 x .63552	$ 63,552.00
	Present value (price) of the note	$ 84,813.45
2)
Period	Cash Payment	Effective Interest Prior Balance x 12%	Increase in Balance	Outstanding Balance
01-Jan				$ 84,813.45
31-Dec-21	7000	$ 10,177.61	$ 3,177.61	$ 87,991.06
31-Dec-22	7000	$ 10,558.93	$ 3,558.93	$ 91,549.99
31-Dec-23	7000	$ 10,986.00	$ 3,986.00	$ 95,535.99
31-Dec-24	7000	$ 11,464.01	$ 4,464.01	$1,00,000.00
Total	28000	$ 43,186.55	$ 15,186.55
3)
Date	Account Titles and Explanation	Debit	Credit
31-Dec-23	Interest expense	$ 10,986.00
	Discount on notes payable (difference)		$ 3,986.00
	Cash		$ 7,000.00
4)	Installment Payment = present value of notes /PVOA(4,12%)
	Installment Payment = $84,813.45/3.03735	$ 27,923.50
5)
Period	Cash Payment	Effective Interest Prior Balance x 12%	Decrease in Balance	Outstanding Balance
01-Jan				$ 84,813.45
31-Dec-21	$ 27,923.50	$ 10,177.61	$ (17,745.89)	$ 67,067.56
31-Dec-22	$ 27,923.50	$ 8,048.11	$ (19,875.40)	$ 47,192.17
31-Dec-23	$ 27,923.50	$ 5,663.06	$ (22,260.44)	$ 24,931.72
31-Dec-24	$ 27,923.50	$ 2,991.78	$ (24,931.73)	$ (0.00)
Total	$ 1,11,694.01	$ 26,880.56	$ (84,813.45)
6)
Date	Account Titles and Explanation	Debit	Credit
31-Dec-23	Interest expense	$ 5,663.06
	Notes payable (difference)	$ 22,260.44
	Cash		$ 27,923.50