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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Hemingway Company purchases equipment by issuing a 7-year, $350,000 non-interest bearing note, when the market rate for this type of note is 10%. Hemingway will pay off the note with equal payments to be made at the end of each year. Prepare the journal entry to record Hemingway’s acquisition of the equipment.

To determine

Journalize entry for acquisition of the equipment by Company H.

Explanation

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains

Prepare journal entry:

DateAccount titles and explanationDebit ($)Credit ($)
 Equipment (1)243,421   
 Discount on notes payable ($350,000$243,421) 106,579
      Notes payable 350,000
  (To record the acquisition of equipment by issuance of non-interest bearing note)  

Table (1)

  • Equipment is an asset and it is increased. Therefore, debit equipment account by $243,421.
  • Discount on notes payable is a contra liability and it is increased. Therefore, debit discount on notes payable account by $106,579.
  • Notes payable is a liability and it is increased. Therefore, credit notes payable account by $350,000

Note:  Present value of annuity from Table 4 of Time Value of money Module, where n=7, i= 10%

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