Question

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

1. Prepare the journal entry(ies) at the date of purchase.
2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

Short answer

1. The capitalized value of the equipment is $86,861.85
2. Interest expense = $5,686.91
3. Discount on Notes Payable = $4,754.80

Step-by-step solution

Meaning of Non-interest Bearing liabilities

Non-Interest Bearing Liabilities are the sums of money due by a corporation(a debt on the balance sheet, current or non-current)that are not subject to interest or penalties. Non-Interest Bearing Liabilities, for the avoidance of doubt, do not include liabilities linked to deferred taxes, pensions, retirement, or leases.

(a) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Equipment	86,861.85
	Discount on Notes Payable	18,138.15
	Cash		30,000.00
	Notes Payable		75,000.00
	(To record the purchase of equipment)

Working notes:

Calculation of value of equipment

$\begin{array}{rcl}\mathit{E}\mathit{q}\mathit{u}\mathit{i}\mathit{p}\mathit{m}\mathit{e}\mathit{n}\mathit{t}& \mathbf{=}& \mathbf{(}\mathbf{Installment}\mathbf{}\mathbf{amount}\mathbf{\times }\mathbf{\times }\mathbf{PV}\mathbf{}\mathbf{factor}\mathbf{)}\mathbf{+}\mathit{D}\mathit{o}\mathit{w}\mathit{n}\mathbf{}\mathit{p}\mathit{a}\mathit{y}\mathit{m}\mathit{e}\mathit{n}\mathit{t}\\ & \mathbf{=}& \mathbf{(}\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{3}\mathbf{.}\mathbf{79079}\mathbf{)}\mathbf{+}\mathbf{30}\mathbf{,}\mathbf{000}\mathbf{.}\mathbf{00}\\ & \mathbf{=}& \mathbf{\$}\mathbf{56}\mathbf{,}\mathbf{861}\mathbf{.}\mathbf{85}\mathbf{+}\mathbf{30}\mathbf{,}\mathbf{000}\mathbf{.}\mathbf{00}\\ & \mathbf{=}& \mathbf{\$}\mathbf{86}\mathbf{,}\mathbf{861}\mathbf{.}\mathbf{85}\end{array}$

Note: PV of $15,000 annuity @ 10% for 5 years

(b) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Notes Payable	15,000.00
	Interest Expense	5,686.19
	Cash		15,000.00
	Discount on Notes Payable		5,686.19
	(To record the first year payment)

Working notes:

Preparing schedule year-by-year

Year	Note Payment A	10% Interest (Balance*10%) B	Reduction of Principal (A-B)	Balance
12/31/16				$56,861.85
12/31/17	$15,000.00	$5,686.19	$9,313.81	47,548.04
12/31/18	15,000.00	4,754.80	10,245.20	37,302.84

(c) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Notes Payable	15,000.00
	Interest Expense	4,754.80
	Cash		15,000.00
	Discount on Notes Payable		4,754.80
	(To record the second year payment)