On 12-31-15, Acme purchased a machine. Acme signed a $500,000 zero-interest bear

Question

On 12-31-15, Acme purchased a machine. Acme signed a $500,000 zero-interest bearing note. The note is payable in full on 12-31-17. Assume an acceptable interest rate on similar notes was 4%. On 12-31-15, Acme incurred and paid $18,000 to have the machine installed in its sales office. Acme uses straight-line depreciation, assumes $0 salvage value, and an estimated 10-year useful life for the machine. Prepare the entries Acme should make related to this machine on:

a. 12-31-15.

b. 12-31-16.

c. 12-31-17.

d. 12-31-18.

Explanation / Answer

a. 12-31-15.

Present value of note payable = 500000*Present value interest factor(4%,2)

= 500000*0.9246 = 462300

Purchase of Machine

Machine DR 480300

Note Payable CR 462300

Cash CR 18000

b. 12-31-16.

Recording interest expense

Interest Expense DR 18492 (462300*4%)

Note payable CR 18492

Recording Depreciation

Depreciation Expense DR 48025 (480250/10)

Accumulated depreciation CR 48025

c. 12-31-17.

Recording interest expense

Interest Expense DR 19208 [462300+18492)*4%]

Note payable CR 19208

Recording Depreciation

Depreciation Expense DR 48025 (480250/10)

Accumulated depreciation CR 48025

Payment of Note

Note payable DR 500000

Cash CR 50000

d. 12-31-18.

Recording Depreciation

Depreciation Expense DR 48025 (480250/10)

Accumulated depreciation CR 48025

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