Chapter 10, Problem 10.9E

(1)

To determine

Acquisition Cost

Acquisition cost is the total cost incurred to obtain an asset. Acquisition cost is also called as historical cost or original cost.

To prepare: Journal entry to record the acquisition of the tractor.

Explanation of Solution

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Tractor   (2)		23,783
	Discount on note payable  (3)		6,217
	Cash			5,000
	Note payable			25,000
	(To record the acquisition costs of the tractor)

Table (1)

• Tractor is an asset and it is increased by $23,783. Therefore, debit Tractor account with $23,783.
• Discount on note payable is an asset and increased by $6,217. Therefore, debit Discount on note payable account with $6,217.
• Cash is an asset and it is decreased by $5,000. Therefore, credit cash account with $5,000.
• Note payable is a liability account. There is an increase in liabilities, and therefore, it is credited with $25,000.

Working note

Determine the present value of note.

The future value of today’s amount which is discounted at a specific interest rate to disclose its current worth is called as present value.

$\begin{array}{c}\text{Present value}=\text{Amount}\times \text{Present value of \$1 for 3 years at 10\%}\\ =\$25,000\times 0.\text{75131}\\ =\$18,783\end{array}$ (1)

Note: PV factor (Present value of $1: n = 3, i = 10%) is taken from the table value (Table 2 in Appendix from textbook).

Determine the total value of tractor.

$\begin{array}{c}\text{Tractor}=\text{Cash}+\text{Present value of note }\left(\text{working note 1}\right)\\ =\$5,000+\$18,783\\ =\$23,783\end{array}$ (2)

Determine the discount on note payable.

$\begin{array}{c}\text{Discount on note payable}=\left(\text{Cash}+\text{Note payable }\right)–\text{Total}\text{value}\text{of}\text{tractor}\\ =\left(\$5,000+\$25,000\right)-\$23,783\\ =\$6,217\end{array}$ (3)

(2)

To determine

The interest expense to be included in 2016 and 2017 income statement for the note.

Explanation of Solution

Determine the interest expense to be included in 2016 income statement for the note payable.

$\begin{array}{c}\text{Interest expense = Present value of the note }\times \text{Interest}\text{rate}\\ \text{= \$18,783}\left(\text{1}\right)\times \text{ 10\%}\\ \text{=}\text{\$1,878}\end{array}$

Thus, the amount of interest expense to be included in 2016 income statement for the note payable is $1,878.

Determine the interest expense to be included in 2017 income statement for the note payable.

$\begin{array}{c}\text{Interest expense}=\left(\text{Present value of the note}+\text{Interest expense, 2018 }\right)\times \text{Interest}\text{rate}\\ =\left(\text{\$18,783}\left(\text{1}\right)+\text{\$1,878}\right)\times \text{10\%}\\ =\text{\$2,066}\end{array}$

Thus, the interest expense for the year 2017 is $2,066.

(3)

To determine

The amount of liability the company will report in its 2016 and 2017 balance sheet for the note payable.

Explanation of Solution

Determine the amount of liability the company will report in its 2016 balance sheet for the note payable.

$\begin{array}{c}\text{Liability}=\text{Note payable –}\left(\begin{array}{l}\text{Discount on note payable }\\ \text{– Interest expense}\end{array}\right)\\ =\$25,000-\left(\$6,217-\$1,878\right)\\ =\$20,661\end{array}$

Thus, the amount of liability the company will report in its 2016 balance sheet for the note payable $20,661.

Determine the amount of liability the company will report in its 2017 balance sheet for the note payable.

$\begin{array}{c}\text{Liability}=\text{Note payable – }\left(\begin{array}{l}\text{Discount on note payable}\\ \text{– Interest expense}\left(\text{2016}\right)\\ -\text{Interest expense}\left(\text{2017}\right)\end{array}\right)\\ =\$25,000-\left(\$6,217-\$1,878-2,066\right)\\ =\$22,727\end{array}$

Thus, the amount of liability the company will report in its 2017 balance sheet for the note payable $22,727