5 On January 1, Snipes Construction paid for earth-moving equipment by issuing a

ID: 2335388 • Letter: 5

Question

5 On January 1, Snipes Construction paid for earth-moving equipment by issuing a $340,000, 5-year note that specified 3% interest to be paid on December 31 of each year. The equipment's retall cash price was unknown, but it was determined that a reasonable Interest rate was 6%. (FV of $1, PV of $1, FVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 5.55 points At what amount should Snipes record the equipment and the note? What journal entry should it record for the transaction? eBook Complete this question by entering your answers in the tabs below Price of Equipment General Journal Print At what amount should Snipes record the equipment and the note? (Round your answers to the nearest whole dollars.) References Table values are based on: Amount Present Value oan repayments Interest Principal Price of equipment Price of E General Journal>

Explanation / Answer

Snipes Construction

Determination of the price of the equipment:

Present value of the note = present value of principal + present value of interest

Present value of principal = $340,000 (P/F, i%, n)

Interest rate, i = 6%

Period , n = 5 years

Present value of principal = $340,000 x (P/F, 6%, 5)

= $340,000 x 0.7473 = $254,082

Present value of interest –

Interest = $340,000 x 3% = $10,200

Present value of interest = $10,200 x (P/A, i%, n)

I% = 6

N = 5 years

Present value of interest = $10,200 x (P/A, 6%, 5) (present value of ordinary annuity)

= $10,200 x 4.212 = $42,962

Hence, present value of note = $254,082 + $42,962 = $297,044

Hence, equipment price = $297,044

Notes payable, face value = $340,000

Discount on notes payable = $340,000 - $297,044 = $42,956

Date

Account Titles and Explanation

Ref. No.

Debit

Credit

1-Jan

Equipment

$297,044

Discount on Notes Payable

$42,956

Notes Payable

$340,000

(To record purchase of equipment by issuing notes payable)