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2 years ago

2. On January 1, 2017, Gaskin Cabinetry Company purchases $300,000 of equipment by paying $50,000 in cash and

Business

1 answer:

docker41 [41]2 years ago

7 0

Answer:

(a) Debit Equipment for $300,000; Credit Cash for $50,000; and Credit Mortgage Note for $250,000

(b) Debit Mortgage Note for $13,572; Deebit Interest expense - Mortgage for $32,500; Credit Cash for $46,072.

Explanation:

(a) Prepare the journal entry for the purchase of the equipment.

The journal entries will look as follows:

Date Accounts Name and Explanation Debit ($) Credit ($)

1 Jan 2017 Equipment 300,000

Cash 50,000

Mortgage Note 250,000

(To record purchase of the equipment.)

(b) Prepare the journal entry for the January 1, 2018 mortgage payment.

The journal entries will look as follows:

Date Accounts Name and Explanation Debit ($) Credit ($)

1 Jan 2018 Mortgage Note 13,572

Interest expense - Mortgage 32,500

Cash 46,072

(To record mortgage and interest payments.)

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True or False: An interest-bearing account is an account that generates interest income on the available balance in the account.

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False

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1 year ago

True or False: Computing interest using the sum-of-the-digits method allocates more interest at the beginning of a loan than at

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Answer:

True

Explanation:

To illustrate how the sum-of-the-digits method allocates interest we can use a lease example:

You are the lessor and you will lease a machine during 4 years. The lease requires 4 equal payments of $100,000 at the beginning of the year. After the lease, the asset's salvage value = $0.

The asset's current value = $300,000, so total interests received = $100,000

Using the sum-of-the-digits method, you will allocate interest as follows:

year 1 = 3/6 x $100,000 = $50,000
year 2 = 2/6 x $100,000 = $33,333
year 3 = 1/6 x $100,000 = $17,000

The largest portion of interests is allocated during the beginning of the loan.

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