Chapter 14, Problem 14.13P

Note and installment note with unrealistic interest rate

• LO14–3

Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2018. A&G paid for the conveyor by issuing a $100,000, four-year note that specified 5% interest to be paid on December 31 of each year, and the note is to be repaid at the end of four years. The conveyor was custom-built for A&G, so its cash price was unknown. By comparison with similar transactions it was determined that a reasonable interest rate was 10%.

Required:

1. Prepare the journal entry for A&G’s purchase of the conveyor on January 1, 2018.

2. Prepare an amortization schedule for the four-year term of the note.

3. Prepare the journal entry for A&G’s third interest payment on December 31, 2020.

4. If A&G’s note had been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, what would be the amount of each installment?

5. Prepare an amortization schedule for the four-year term of the installment note.

6. Prepare the journal entry for A&G’s third installment payment on December 31, 2020.