Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, manage

Question

Tornado Manufacturing Inc. builds cleaning equipment. On January 1, 2011, management at Tornado determines that it will need to replace some machinery four years from now [on December 31, 2014], and which it estimates will cost $160,000 on that date. Management decides to have $160,000 available on December 31, 2014 by making 4 equal annual deposits into a fund at its bank each December 31. It is estimated that the interest rate the deposits will earn is 7% compounded annually.

Assume that each annual deposit to be made is $35,000 [if you want to calculate it for practice, please do so; the correct amount is $36,037]. Which one of the following would be included in the JE needed to record the first deposit made on December 31, 2011?

A. dr. Equipment Fund $35,000
B. cr. Equipment Liability $35,000
C. dr. Equipment $35,000
D. cr. Interest Income $2,450

Explanation / Answer

A. dr. Equipment Fund $35,000 On the date of deposit - a equipment fund (Investment) is debited.

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