Question

On January 1, 2019, Sanders Corporation purchased equipment having a fair value of $68,301.30 by issuing a non-interest-bearing, $100,000, 4-year note due December 31, 2022. Required: Prepare the journal entries to record (1) the purchase of the equipment, (2) the annual interest charges over the life of the note, and (3) the repayment of the note.

Answer 1

Answer:

(1)

Jan 01, 2019

Dr. Equipment $68,301.30

Dr. Discount on note Payable $31,698.70

Cr. Note Payable $1,00,000

(2)

Dec 31, 2019

Dr. Interest Expenses $7,924.68  

Cr. Discount on note Payable $7,924.68

Dec 31, 2020

Dr. Interest Expenses $7,924.68  

Cr. Discount on note Payable $7,924.68

Dec 31, 2021

Dr. Interest Expenses $7,924.68  

Cr. Discount on note Payable $7,924.68

Dec 31, 2022

Dr. Interest Expenses $7,924.68  

Cr. Discount on note Payable $7,924.68

(3)

Dec 31, 2022

Dr. Note Payable $1,00,000

Cr. Cash $1,00,000

Explanation:

The asset is recorded at the discounted value of the note payable.

Discount on the bond = Face value of Loan note - Fair value of equipment = $100,000 - $68,301.30 = $31,698.70

Annual Interest expense = Total Discount on the bond / Numbers of years

Annual Interest expense = $31,698.70 / 4

Annual Interest expense = $7,924.68

The Note will be payable on December 31, 2022 by value of $100,000