Waterway Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2020, to expand its production capacity to meet customers' demand for its product. Waterway issues a(n) $720,000, 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 $144,000 installments due at the end of each year over the life of the note. 1. Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. 2. Prepare the journal entryies) at the end of the second year to record the payment and interest. 3. Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Waterway Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2020, to expand its production capacity to meet customers' demand for its product. Waterway issues a(n) $720,000, 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 $144,000 installments due at the end of each year over the life of the note. 1. Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. 2. Prepare the journal entryies) at the end of the second year to record the payment and interest. 3. Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Waterway Inc. has decided to purchase equipment from Central Michigan
Industries on January 2, 2020, to expand its production capacity to meet
customers' demand for its product. Waterway issues a(n) $720,000, 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 $144,000 installments due at the end of each year over
the life of the note.
1. Prepare the journal entry(ies) at the end of the first year to record the payment
and interest, assuming that the company employs the effective-interest
method.
2. Prepare the journal entryies) at the end of the second year to record the
payment and interest.
3. Assuming that the equipment had a 10-year life and no salvage value, prepare
the journal entry necessary to record depreciation in the first year. (Straight-line
depreciation is employed.)

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