Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was

Question

Braxton Technologies, Inc., constructed a conveyor for A&G Warehousers that was completed and ready for use on January 1, 2018. A&G paid for the conveyor by issuing a $125,000, four-year note that specified 5% interest to be paid on December 31 of each year, and the note is to be repaid at the end of four years. The conveyor was custom-built for A&G, so its cash price was unknown. By comparison with similar transactions it was determined that a reasonable interest rate was 12%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. Prepare the journal entry for A&G’s purchase of the conveyor on January 1, 2018.
2. Prepare an amortization schedule for the four-year term of the note.
3. Prepare the journal entry for A&G’s third interest payment on December 31, 2020.
4. If A&G’s note had been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2018, what would be the amount of each installment?
5. By considering the installment payment of required 4. Prepare an amortization schedule for the four-year term of the installment note.
6. Prepare the journal entry for A&G’s third installment payment on December 31, 2020.

Explanation / Answer

Solution 1:

Purchase price of conveyor = Present value of interest and principal discounted at 12%

= ($125,000*5%) * Cumulative PV Factor at 12% for 4 periods + $125,000 * PV factor at 12% for 4th period

=$6,250 * 3.037349 + $125,000* 0.635518 = $98,423

Solution 2:

Solution 3:

Solution 4:

If installment note to be paid in four equal installment then amount of each installment = $125,000 / Cumulative PV factor at 5% for 4 periods

= $125,000 / 3.545951 = $35,251.47

Note: I have answered first 4 parts as per chegg policy. Kindly post separate question for answer of remaining parts.

Amortization schedule Note Date Cash Paid Interest expense to be recorded Discount Amortized Unamortized Discount Carrying Value 1-Jan-18 $26,577 $98,423 31-Dec-18 $6,250 $11,811 $5,561 $21,016 $103,984 31-Dec-19 $6,250 $12,478 $6,228 $14,788 $110,212 31-Dec-20 $6,250 $13,225 $6,975 $7,813 $117,187 31-Dec-21 $6,250 $14,062 $7,812 $0 $125,000

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