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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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Discounting of Notes Payable On October 30, 2019, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The lace value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%.

Required:

1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used.

2. Show how the preceding items would be reported on the December 31, 2019, balance sheet.

1.

To determine

Prepare the journal entries and adjusting entry in the books of Company S.

Explanation

Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.

Prepare the journal entry to record the purchase of machinery:

DateAccount titles and explanationDebit ($)Credit($)
October 30, 2019Machinery (1)$21,779.37 
 Discount on notes payable (2)$2,220.63 
 Notes Payable $24,000.00
 (To record the purchase of machinery on note)  

Table (1)

Working note (1):

Determine the present value of machinery or net obligation as on October 30, 2019.

(Present value of machinery or Net obligation) = {Amount to be paid in four equal installment ×Present value of an ordinary annuity of $1 at 4% for 4 time periods}=$6,000×3.629895=$21,779.37

Working note (2):

Determine the total amount of interest expenses or discount on notes payable.

Total amount of interest expense or discount on notes payable }=Maturity value of note Present value=$24,000$21,779.37=$2,220.63

Prepare the adjusting entry to record the interest expense:

DateAccount titles and explanationDebit ($)Credit($)
December 31, 2019Interest expense (4)$580.78 
 Discount on notes payable $580.78
 (To record accrued expense)  

Table (2)

Working note (3):

Prepare the schedule of interest expense and obligation reduction:

DatePayment of instalment4% Interest expensesReduction of obligationNet obligation
October 30, 2019   $21,779.37
January 31, 2020$6,000.00$871.17$5,128.83$16,650.54
April 30, 2020$6,000.00$666.02$5,333.98$11,316.56
July 31, 2020$6,000.00$452.66$5,547.34$5,769.22
October 30, 2020$6,000.00$230.78$5,769.22$0.00
 $24,000.00$2,220.63$21,779.37 

Table (3)

Working note (4):

Determine the accrued expenses for the month of November and December.

Accrued expenses = [4% interest expenses payable at first quarter ×2 month accrued in first quarterNumber of months in a quarter]=$871

2.

To determine

Show the manner in which the preceding items would be reported on the balance sheet as at December 31, 2019.

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