Question

Tamarisk Corporation purchased a computer on December 31, 2019, for $126,000, paying $36,000 down and agreeing to pay the balance in five equal installments of $18,000 payable each December 31 beginning in 2020. An assumed interest rate of 8% is implicit in the purchase price. Prepare the journal entry at the date of purchase. Prepare the journal entry at December 31, 2020, to record the payment and interest (effective-interest method employed). Prepare the journal entry at December 31, 2021, to record the payment and interest (effective-interest method employed).

Answer 1

1.

Date	Account Title and Explanation	Debit	Credit
December 31 2019	Equipment	93495
	Discount on Notes Payable	32505
	Notes Payable		90000
	Cash		36000
(Recorded Purchase of Equipment)

2)

Date	Account Title and Explanation	Debit	Credit
December 31 2020	Interest Expenses	4600
	Notes Payable	18000
	Discount on Notes Payable		4600
	Cash		18000
(Recorded Payment of 1st installment & interest expenses)

3)

Date	Account Title and Explanation	Debit	Credit
December 31 2021	Interest Expenses	3528
	Notes Payable	18000
	Discount on Notes Payable		3528
	Cash		18000
(Recorded Payment of 2nd installment & interest expenses)

Working

1)Notes Payable = 18000*5 = 90000

Equipment = 36000 + 18000*(1-(1+8%)^-5)/10%

Equipment = 93495

Discount on Notes Payable = 126000-93495 = 32505

2) Interest Expense = (90000-32505)*8% = 4600

Amortization of Discount = 4600

Unamortized discount = 32505 - 4600= 27905

3) Interest Expenses = (90000-18000 - 27905)*8% = 3528