Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter C, Problem 3CP

1.

To determine

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

1.

Expert Solution
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Answer to Problem 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:

Presentvalue} = {Single payment × Present value of $1 at interest rate for time periods}

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

Presentvalue} = {Single payment × Present value of $1 at interest rate for time periods}=$10,000×2.67301=$26,730.1=$26,730 (rounded)

2.

To determine

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

2.

Expert Solution
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Answer to Problem 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.

3.

Expert Solution
Check Mark

Answer to Problem 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:

Interest = Principal × Rate of Interest ×Time Period=$26,730×6%×1=$26,730×6100=$1,604 (1)

Calculate the amount paid on the notes payable:

Notes Payable = Cash Interest =$10,000$1,604=$8,396 (2)

4.

To determine

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

4.

Expert Solution
Check Mark

Answer to Problem 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:

Interest = Principal × Rate of Interest ×Time Period=($26,730$8,396)×6%×1=$18,334×6100=$1,100.04=$1,100 (rounded) (3)

Calculate the amount paid on the notes payable:

Notes Payable = Cash Interest =$10,000$1,100=$8,900 (4)

5.

To determine

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

5.

Expert Solution
Check Mark

Answer to Problem 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:

Interest = Principal × Rate of Interest ×Time Period=($26,730  $8,396  8,900)×6%×1=$9,434×6100=$566.04=$566 (rounded) (5)

Calculate the amount paid on the notes payable:

Notes Payable = Cash Interest =$10,000$566=$9,434 (6)

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Students have asked these similar questions
Canvas Problem: Long-Term Notes Payable XYZ, Inc. has purchased new equipment. The contract with the manufacturer requires XYZ to make a $10,000 down payment and to sign a note to pay $50,000 per year at the end of each of the next 6 years at an annual interest rate of 8%. Each equal payment of $50,000 includes principal and interest on the unpaid balance. Instructions: Answer the following questions. a. At what amount should XYZ record the equipment on the date of acquisition? Use the present value tables and Excel. b. Prepare the journal entry to record the equipment purchase. c. Prepare the journal entries to record the payments XYZ makes at the end of the first and the end of the second year.
On quesiton C: Johnson’s borrowed $282,000 at a(n) 9 percent annual interest rate on April 1 of the current year to expand its boat storage facility. The loan requires Johnson’s to pay the interest quarterly until the note is repaid in three years. Johnson’s paid quarterly interest on July 1 and October 1. Can you explain why the forumla is  282000*9%*2/12?  I understand 282000*9% = 25380 (yearly interest) But why mulitpy by 2?
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