Nash Cosmetics Co. purchased machinery on December 31, 2016, paying $52,900 down

Question

Nash Cosmetics Co. purchased machinery on December 31, 2016, paying $52,900 down and agreeing to pay the balance in four equal installments of $56,000 payable each December 31. An assumed interest of 10% is implicit in the purchase price.

Prepare the journal entries that would be recorded for the purchase and for (1) the payments and (2) interest on the following dates. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

No.

Account Titles and Explanation

Debit

Credit

(a) December 31, 2016. (b) December 31, 2017. (c) December 31, 2018. (d) December 31, 2019. (e) December 31, 2020.

Explanation / Answer

Solution:

Fair value of machine = Present value of installments + Down payment

= $56000 * cumulative PV factor for 4 periods at 10% + $52,900

= $56,000 * 3.169865 + $52,900 = $230,412

Note Amortization Schedule Year Cash Paid Interest Expense Discount Amortized Carrying Value 0 $177,512 1 $56,000.00 $17,751 $17,751 $139,263 2 $56,000.00 $13,926 $13,926 $97,190 3 $56,000.00 $9,719 $9,719 $50,908 4 $56,000.00 $5,092 $5,092 $0

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