Question 2 Andrew Co., decided to purchase a new truck on January 2, 2017 and is
ID: 2586779 • Letter: Q
Question
Question 2 Andrew Co., decided to purchase a new truck on January 2, 2017 and issues a $200,000, 4 year zero interest bearing note to the GMC Truck corporation when the prevailing rate of interest for similar notes is 6%. Andrew will make equal payments of $50,000 at the end of each year over the life of the note. Required 1) 2) 3) Calculate the amount that Andrew should value the truck. Prepare the entry to record the purchase on January 1, 2017. Prepare the entry to record the payment and interest at the end of the first (2017) and second (2018) years assuming the company uses the effective interest rate method.Explanation / Answer
particular
amount
year
pvf@6%
present value
first payment
$500000
1
0.9434
$47170
secont payment
$50000
2
0.8900
$44500
third payment
$50000
3
0.8396
$41980
fourth payment
$50000
4
0.7921
$39605
value of the truck
$172880
2. Journal entry of purchase on 1 january 2017
S.N.
particular
L.F.
Dr. amount
Cr. amount
1.
Truck account
$172880
to GMC truck corporation
$172880
( Being truck purchase )
3. Calculation of interest and journal entries for payment
year
opening balance
installment
interest
principle paid
closing balance
1
172880
50000
10372.80
39627.20
133252.80
2
133252.80
50000
7995.168
42004.832
91247.968
Record of payment in first year
GMC truck corporation Dr. 39372.20
interest Dr. 10372.80
To bank 50000
( Being first installment paid.)
Record of payment in second year
GMC Truck corporation Dr. 42002.832
interest Dr. 7995.168
To bank 50000
( Being second installment paid)
particular
amount
year
pvf@6%
present value
first payment
$500000
1
0.9434
$47170
secont payment
$50000
2
0.8900
$44500
third payment
$50000
3
0.8396
$41980
fourth payment
$50000
4
0.7921
$39605
value of the truck
$172880
2. Journal entry of purchase on 1 january 2017
S.N.
particular
L.F.
Dr. amount
Cr. amount
1.
Truck account
$172880
to GMC truck corporation
$172880
( Being truck purchase )
3. Calculation of interest and journal entries for payment
year
opening balance
installment
interest
principle paid
closing balance
1
172880
50000
10372.80
39627.20
133252.80
2
133252.80
50000
7995.168
42004.832
91247.968
Record of payment in first year
GMC truck corporation Dr. 39372.20
interest Dr. 10372.80
To bank 50000
( Being first installment paid.)
Record of payment in second year
GMC Truck corporation Dr. 42002.832
interest Dr. 7995.168
To bank 50000
( Being second installment paid)
particular
amount
year
pvf@6%
present value
first payment
$500000
1
0.9434
$47170
secont payment
$50000
2
0.8900
$44500
third payment
$50000
3
0.8396
$41980
fourth payment
$50000
4
0.7921
$39605
value of the truck
$172880
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