Question

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

Short answer

1. Capitalized value of machine is $182,500.
2. Discount amortized on 31 December 2017 totals$10,600.
3. Discount amortized on 31 December 2018 totals$8,248.
4. Discount amortized on 31 December 2019 totals$5,708.
5. Discount amortized on 31 December 2020 totals $2,965.

Step-by-step solution

Definition of Note Payable

Note payable can be defined as the written promise under which the writerpromises to repay the borrowed amount. It is generally reported as a short-term liability.

Journal entries on December 31, 2016

Date	Accounts and Explanation	Debit ($)	Credit ($)
31, Dec 2016	Machine	182,500
	Discount on notes payable	27,500
	Cash		50,000
	Note payable		160,000
	(To record the purchase of machine against note)

Working note:

Particular	Amount $
Present value of the note payable ($40,000 @ 8% for 4 years) (3.3125)	$132,500
Down payment	$50,000
The capitalized value of the machine	$182,500

Amortization Schedule:

Date	Cash paid	Interest expenses	Amortization	Carrying amount of note
31 Dec 2016				$132,500
31 Dec 2017	$40,000	$10,600	$29,400	$103,100
31 Dec 2018	$40,000	$8,248	$31,752	$71,348
31 Dec 2019	$40,000	$5,708	$34,292	$37,056
31 Dec 2020	$40,000	$2,965	$37,056	$0

Journal entries on December 31, 2017

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2017	Note payable	$40,000
	Cash		$40,000
31 Dec 2017	Interest expenses	$10,600
	Discount on notes payable		$10,600

Journal entries on December 31, 2018

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2018	Note payable	40,000
	Cash		40,000
31 Dec 2018	Interest expenses	8,248
	Discount on notes payable		8,248

Journal entries on December 31, 2019

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2019	Note payable	40,000
	Cash		40,000
31 Dec 2019	Interest expenses	5,708
	Discount on notes payable		5,708

Journal entries on December 31, 2020

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 Dec 2019	Note payable	40,000
	Cash		40,000
31 Dec 2019	Interest expenses	2,965
	Discount on notes payable		2,965