Question

Flint Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Flint issues a(n) $912,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 11%. The company will pay off the note in five $182,400 installments due at the end of each year over the life of the note.
1.Prepare the journal entry at the date of purchase.
2.Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
3. Prepare the journal entry at the end of the second year to record the payment and interest.
4. Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Answer 1

Answer:

Please see the answers below:

Explanation:

1.

Debit: Equipment         $912,000

Credit: Notes Payable                 $912,000

To record purchase of equipment at zero interest bearing note Central Michigan.

2.

Debit: Notes Payable        $182,400

Debit: Interest Payable      $20,064

Credit: Cash                                     $202,464

To record Cash Payment of 1st year Installment and Interest.

3.

Debit: Notes Payable        $182,400

Debit: Interest Payable      $20,064

Credit: Cash                                     $202,464

To record Cash Payment of 2nd year Installment and Interest.

4.

Debit: Depreciation Expense          $91,200

Credit: Accumulated Depreciation               $91,200

To record Depreciation Expense on Equipment over the life of 10 years with no salvage value. (Straight Line Depreciation is employed).