Acquiring an Asset with a Note Payable (Deferred Payment Arrangements). On December 31, 2018, the Clearwater Corporation acquired a custom-made plant asset by issuing a promissory note with a face value of $750,000, a due date of December 31, 2023, and a stated (coupon) rate of interest of 2%. Interest is compounded annually and is payable at the end on each year. The fair value of the customized asset is not readily determinable and the note receivable is not publicly traded. Given the company’s incremental borrowing rate and current market conditions, the imputed rate of interest for the note is estimated as 6%.
Determine the present value of the note and prepare the
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- 1. Patriotic Company purchased a machine for P6,000,000 on January 1, 2019, and received a government grant of P600,000 toward the asset cost. The accounting policy is to treat the grant as a reduction in the cost of the asset. The machine is to be depreciated on a straight-line basis over 10 years with a residual value of P500,000. On January 1, 2021, the grant becomes fully repayable because of noncompliance with conditions. What is the depreciation for 2019? What is the depreciation for 2021? What is the carrying amount of the machinery at the end of 2021? What is the depreciation for 2022?arrow_forwardCathymae Company acquired two items of machinery as follows:• On January 1, 2020, Cathymae Company purchased a machine for P2,000,000 in exchange for a noninterest bearing note requiring four payments of P500,000. The first payment was made on December 31, 2020, and the others are due annually on December 31. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 3.04 for four periods. The new machine was damaged during its installation and the repair cost amounted to P30,000.• On January 1, 2020, Cathymae Company acquired a used machine by issuing the seller a four-year, noninterest-bearing note for P2,000,000. The note is due on January 1, 2024. In recent borrowing, Cathymae Company has paid a 12% interest for this type of note. The present value of 1 at 12% for 4 years is 0.64.What is the total cost of the two machines?arrow_forwardCathymae Company acquired two items of machinery as follows: • On January 1, 2020, Cathymae Company purchased a machine for P2,000,000 in exchange for a noninterest bearing note requiring four payments of P500,000. The first payment was made on December 31, 2020, and the others are due annually on December 31. The prevailing rate of interest for this type of note at date of issuance was 12%. The present value of an ordinary annuity of 1 at 12% is 3.04 for four periods. The new machine was damaged during its installation and the repair cost amounted to P30,000. • On January 1, 2020, Cathymae Company acquired a used machine by issuing the seller a four-year, noninterest-bearing note for P2,000,000. The note is due on January 1, 2024. In recent borrowing, Cathymae Company has paid a 12% interest for this type of note. The present value of 1 at 12% for 4 years is 0.64. What is the total cost of the two machines?arrow_forward
- Natalie Company purchased a machine for P6,600,000 on January 1, 2021 and received a government grant of P600,000 towards the capital cost. The policy is to treat the grant as reduction in the cost of asset. The machine is to be depreciated on a straight light basis over 10 years with a residual value of P500,000. On January 1, 2023, the grant became fully repayable because of noncompliance with conditions. What is the depreciation for 2021? What is the depreciation for 2023?arrow_forwardAngelo Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. On January 1, 2020, Angelo Company leased the machine for a period of six years, after which title to the machine is transferred to the lessee. The six annual payment are due each January 1 and the first payment was made on January 1, 2020. The residual value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by Angelo Company. What is the annual lease payment payable in advance required to yield the desired return?arrow_forwardAn entity acquired an asset costing P3,165,000. The asset is leased on January 1, 2019 to another entity. Five annual lease payments are due each December 31, beginning December 31, 2019. The unguaranteed residual value of the asset at the end of the lease term on December 31, 2013 is P500,000. The asset will revert to the lessor at the end of the lease term. The lessor’s implicit interest rate is 12%. The PV of 1 at 12% for 5 periods is .57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. What is the annual rental payment? 879,166 740,128 800,000 500,000arrow_forward
- On April 1, 2021, Xai Company acquired a machine by signing a four-year lease. Annual rentals of P1,742,174 are payable at the beginning of each lease year starting April 1, 2021. Xai is given the option to buy the machine for P250,000 on April 1, 2025, when the asset's market price is expected to be P1,250,000. The asset's useful life is 6 years, at the end of which the asset's scrap value is expected to be P600,000. Xai uses the straight-line method to depreciate this asset. With an implicit interest rate of 10%, Xai appropriately recorded the machine and the related liability on April 1, 2021 at P6,245,450. Xai Company follows the calendar year as its accounting period. 1. How much is the depreciation expense recognized by Xai for the years ended December 31, 2022 and December 31, 2021? A. P940,908 and P705,681 B. P1.411,363 and P1,058,522 C. P1,040,833 and P780,625 D. P1.561,363 and P1,171,022arrow_forwardOn January 1, 2024, Ghosh Industries leased a high-performance conveyer to Karrier Company for a four-year period ending December 31, 2027, at which time possession of the leased asset will revert back to Ghosh The equipment cost Ghosh $957,800 and has an expected useful life of five years. . Ghosh expects the residual value at December 31, 2027, will be $301,800. . Negotiations led to the lessee guaranteeing a $341,800 residual value Equal payments under the finance/sales-type lease are $201.800 and are due on December 31 of each year with the first payment being made on December 31, 2024 • Karrier is aware that Ghosh used a 5% interest rate when calculating lease payments. . Note: Use tables, Excel, or a financial calculator. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) Required: 1. Prepare the appropriate entries for both Karrier and Ghosh on January 1, 2024, to record the lease 2. Prepare all appropriate entries for both Karrier and Ghosh on December 31,…arrow_forwardOn 1 July 2017, Entity A purchased a property (Land and Building) for $5,000,000. The value of the land and building are $600,000 and $4,400,000 respectively. The expected useful life of the building is 50 years with a residual value of $100,000. Entity A paid 60% by a cheque on 1 July 2017 and the balance was settled on 1 August 2017 through a bank transfer. On 30 June 2019, the property was revalued to $7,562,224 (land $980,224 and buildings $6,582,000) with a new estimated residual value of $120,000. On 30 June 2021, the property was sold to Entity B for $8,600,000. Entity A received 70% on the same date and the balance was settled on 1 August 2021. Entity A opts for annual transfer of the revaluation reserve. REQUIRED: According to relevant accounting standards, prepare journal entries to record the transactions of Entity A from 1 July 2017 to 1 August 2022. ACCOUNTS FOR INPUT: | Machine | Land | Building | Bank | Payable | Receivable | Retained earnings | Share capital | No…arrow_forward
- On December 30, 2019, Machine M with a carrying amount of 120,000 (Cost 400,000) and a fair value of P100,000 was exchanged for a similar asset with a fair value of 150,000 . In addition , Charie paid 10, 000 to acquire the new machine . The exchange was recorded by a debit to Machinery and a credit to cash for 20,000 What is the correct cost of the PPE received ?arrow_forwardCanada Company purchased a machine at an invoice price of P4,500,000 with terms 2/10, n/30. The entity paid the required amount for the machine beyond the discount period. The entity paid P80,000 for delivery of the machine and P310,000 for installation and testing. The machine was ready for use on January 1, 2019. It was estimated that the machine would have a useful life of 5 years and a residual value of P800,000. Engineering estimated indicated that the useful life of productive units was 200,000. Units actually produced during the first two years were 30,000 in 2019 and 48,000 in 2020. The entity decided to use the output method of depreciation. What is the accumulated depreciation of the machine on December 31, 2020? A. 1,560,000 B. 1,600,000 C. 960,000 D. 600,000arrow_forwardOn 1 July 2022, your company acquired a machine for $103,000 on credit and decided to depreciate it for 25 years with no residual amount. The credit was taken from a local bank that charges 4.2% per annum with payments every year on 30 June. Assume that the fair values of this asset were: Date Fair Value 1/7/2023 $105,000 30/11/2023 $98,000 30/6/2024 $80,000 a. Using the cost model, prepare the relevant journal entries from the date of acquisition to 30 June 2023 b.Using the revaluation model, prepare the relevant journal entries from the date of acquisition to 30 June 2023.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning