Chapter AC, Problem AC.3CP

1.

To determine

To Compute: The present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%.

Answer to Problem AC.3CP

The present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%, is $26,730.

Explanation of Solution

Present value is the amount of future value reduced or discounted at a rate of interest till particular current date.

Formula to compute present value of single payment with tables:

$\begin{array}{l}\text{Present}\\ \text{value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Single payment × Present value of }\\ \text{\$1 at interest rate for time periods}\end{array}\right\}$

Compute the present value of the note, rounded to the nearest dollar, using a typical interest rate of 6%.

$\begin{array}{c}\begin{array}{l}\text{Present}\\ \text{value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Single payment × Present value of }\\ \text{\$1 at interest rate for time periods}\end{array}\right\}\\ =\$10,000\times 2.67301\\ =\$26,730.1\\ =\$26,730\left(\text{rounded}\right)\end{array}$

2.

To determine

To Journalize: An entry to record the purchase of the equipment, rounded to the nearest dollar.

Answer to Problem AC.3CP

The journal entry to record the purchase of equipment is shown below.

Date	Account Title	Debit ($)	Credit ($)
	Equipment	$26,730
	Notes payable		$26,730
	(To record the purchase of equipment)

Table (1)

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

3.

To determine

To Journalize: An adjusting entry to record the first payment at the end of the first year.

Answer to Problem AC.3CP

The adjusting entry to record first payment at the end of the first year is shown below.

Date	Account Title	Debit ($)	Credit ($)
	Interest Expense(1)	$1,604
	Notes payable(2)	$8,396
	Cash		$10,000
	(To record the first payment)

Table (2)

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Working Notes:

Calculate the interest on the notes payable:

$\begin{array}{c}\text{Interest = Principal × Rate of Interest ×Time Period}\\ =\$26,730\times 6\%\times 1\\ =\$26,730\times \frac{6}{100}\\ =\$1,604\end{array}$ (1)

Calculate the amount paid on the notes payable:

$\begin{array}{c}\text{Notes Payable = Cash }-\text{Interest }\\ =\$10,000-\$1,604\\ =\$8,396\end{array}$ (2)

4.

To determine

To Journalize: An adjusting entry to record the second payment at the end of the second year.

Answer to Problem AC.3CP

The adjusting entry to record the second payment at the end of the second year is shown below.

Date	Account Title	Debit ($)	Credit ($)
	Interest Expense(3)	$1,100
	Notes payable(4)	$8,900
	Cash		$10,000
	(To record the second payment)

Table (3)

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Working Notes:

Calculate the interest on the notes payable:

$\begin{array}{c}\text{Interest = Principal × Rate of Interest ×Time Period}\\ =\left(\$26,730-\$8,396\right)\times 6\%\times 1\\ =\$18,334\times \frac{6}{100}\\ =\$1,100.04\\ =\$1,100\left(\text{rounded}\right)\end{array}$ (3)

Calculate the amount paid on the notes payable:

$\begin{array}{c}\text{Notes Payable = Cash }-\text{Interest }\\ =\$10,000-\$1,100\\ =\$8,900\end{array}$ (4)

5.

To determine

To Journalize: An entry to record the payment for the equipment, rounded to the nearest dollar.

Answer to Problem AC.3CP

The journal entry to record the payment for equipment is shown below.

Date	Account Title	Debit ($)	Credit ($)
	Interest Expense(5)	$566
	Notes payable(6)	$9,434
	Cash		$10,000
	(To record the third payment)

Table (4)

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Working Notes:

Calculate the interest on the notes payable:

$\begin{array}{c}\text{Interest = Principal × Rate of Interest ×Time Period}\\ =\left(\$26,730-\$8,396–8,900\right)\times 6\%\times 1\\ =\$9,434\times \frac{6}{100}\\ =\$566.04\\ =\$566\left(\text{rounded}\right)\end{array}$ (5)

Calculate the amount paid on the notes payable:

$\begin{array}{c}\text{Notes Payable = Cash }-\text{Interest }\\ =\$10,000-\$566\\ =\$9,434\end{array}$ (6)