Answer and Explanation:
1. The Journal entry is shown below:-
Equipment Dr, $4 million
To Notes payable $4 million
(Being purchase of machine is recorded)
2. The preparation of amortization schedule for the four-year term of the installment note is shown below:-
Present value annuity factor for 10% for 4 years = 3.16987
Note amount = $4,000,000
Annuity value = $1,261,881
($4,000,000 ÷ 3.16987)
A B = (A × 10%) C D = (C - B) E = (A - D)
Dec 31 Opening value Effective Installment Reduction in Ending value
of Note Interest Paid value of note of note
2021 $4,000,000 $400,000 $1,261,881 $861,881 $3,138,119
2022 $3,138,119 $313,812 $1,261,881 $948,069 $2,190,050
2023 $2,190,050 $219,005 $1,261,881 $1,042,876 $1,147,174
2024 $1,147,174 $114,707 $1,261,881 $1,147,174 $0
3. The Journal entry to record the first installment is shown below:-
Interest expense Dr, $400,000
Long term note payable Dr, $861,881
To Cash $1,261,881
(Being the first installment paid is recorded)
4. The Journal entry to record the third installment is shown below:-
Interest expense Dr, $219,005
Long term note payable Dr, $1,042,876
To Cash $1,261,881
(Being third installment paid is recorded)
