Chapter AC, Problem AC.2PB

Recording Equipment Purchase with Two-Year Note

Southtown Corporation purchased equipment and in exchange signed a two-year promissory note. The note requires Southtown to make a single payment of $100,000 in two years. Southtown has other promissory notes that charge interest at the annual rate of 6 percent.

Required:

1. 1. Compute the present value of the note, rounded to the nearest dollar, using Southtown’s typical interest rate of 6 percent.
2. 2. Show the journal entry to record the equipment purchase (round to the nearest dollar).
3. 3. Show the adjusting journal entry at the end of the first year to record interest on the note.
4. 4. Show the adjusting journal entry at the end of the second year to record interest on the note (but do not record the payment of $100,000 yet).
5. 5. Show the journal entry at the end of the second year to record payment of the $100,000.