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(1)
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:
(1)
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Explanation of Solution
Prepare journal entry to record the acquisition of the tractor.
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.
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.
Determine the discount on note payable.
(2)
The interest expense to be included in 2018 and 2019 income statement for the note.
(2)
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Explanation of Solution
Determine the interest expense to be included in 2018 income statement for the note payable.
Thus, the amount of interest expense to be included in 2018 income statement for the note payableis$1,878.
Determine the interest expense to be included in 2019 income statement for the note payable.
Thus, the interest expense for the year 2019 is$2,066.
(3)
The amount of liability the company will report in its 2018 and 2019
(3)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Determine the amount of liability the company will report in its 2018 balance sheet for the note payable.
Thus, the amount of liability the company will report in its 2018 balance sheet for the note payable$20,661.
Determine the amount of liability the company will report in its 2019 balance sheet for the note payable.
Thus, the amount of liability the company will report in its 2019 balance sheet for the note payable$22,727.
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