Question

The company purchased office equipment costing $8,000 by signing a 6% note. The Equipment has a 5 year life and no salvage value. The note requires monthly principal payments of $225 beginning on October 1st until the balance is paid.

Answer 1

Answer:

Equipment 8,000 debit

  Note Payable 8,000 credit

--to record signing of a note in exchange of equipment--

interest expense     40 debit

note payable          225 debit

         cash                          265 credit

--to record first payment

interest expense     38.88 debit

note payable          225 debit

         cash                          263.88 credit

--to record second payment

Explanation:

singing of the note:

we enter the equipment (assets) and the promissory note we signed (liability)

at each payment:

we calculate the carrying value  times monthly rate to know interest

Then, we add the principal payment to know the total quota:

monthly rate: 6% annual divide by 12 months per year: 0.5% monthly rate

first payment:

8,000 x 0.005 = 40 interest expense

                        + 225 principal amortization

                          265 cash disbursements

second payment:

carrying value: 8,000 - 225 amortization = 7,775

7,775 x 0.005 = 38.88

cash disbursment: 38.88 + 225 = 263.88