Ivanhoe Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers' demand for its product. Ivanhoe issues a(n) $1,104,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $220,800 installments due at the end of each year over the life of the note.
Prepare the journal entry at the date of purchase (Round factor values to 5 decimal places, e 1.25124 and final answers to o decimal places, e.g. 5,275.)
Accounting for a Non-Interest-Bearing Note Payable
So, in this situation described in the Question Stem, a piece of equipment is being purchased using a non-interest-bearing note with annual payments at the end of each year for 5 years. In this situation, we are also provide with the prevailing market rate of interest for obligation of this type and nature, which is an annual interest rate of 12%. So, in this case, under the accounting rules, we would record the equipment and the note payable resulting from the purchase at the present value of an annuity due, n (number of years) = 5, and i (annual interest rate) = 12%. The equipment will be depreciated over 5 years, and the note payments will be split between interest and principal reduction on the note payable using the effective interest rate method.
Answer and Explanation: 1
- Prepare the journal entry at the date of purchase (Round factor values to 5 decimal places, e 1.25124 and final answers to o decimal places, e.g....
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fromChapter 4 / Lesson 7
Discover how to account for both non-interest and interest-bearing notes. Examine a dilemma presented in an example, explore a detailed overview of both interest-bearing and non-interest-bearing notes, and see how to put it all together.