Business, 25.09.2020 02:01 maciemarklin3522

Recording Purchase of Equipment through Debt and Equity On January 1, 2020, Sidelines Company purchases equipment with an estimated 6-year useful life by making a $14,000 cash payment and issuing a noninterset-bearing note for $48,000 due in two years. The fair value of the the equipment is unknown. An 11% annual interest rate is typical of this transaction. The company uses the effective interest method to amortize interest expense and the straight-line method to estimate depreciation expense. a. Prepare the entry to record the purchase on January 1, 2020.
b. Prepare the entry on December 31, 2020, to record (1) interest expense and (2) depreciation expense.
c. Indicate the balance sheet presentation related to this transaction as of December 31, 2020.
d. Prepare the entry on December 31, 2021, to record (1) interest expense and payment of the note and (2) depreciation expense.
e. Assume instead that Sidelines exchanged 1,000 shares of its own $10 par value common stock along with $14,000 cash for the equipment. At the date of the exchange, the stock was trading on the market at $40 per share. Prepare the entry to record the purchase of equipment.

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Answer from: eddsworldfrantic

We calculate PV of the non interest bearing note payable

PV = FV / (1 + i%)^n

When FV= $ 48,000, i = 11% n = 2years

PV = 48,000 / (1+11%)^-2

PV = 48,000 / 1.11^-2

PV = 48,000 * 0.8116

PV = 38,957.8

PV = $38,958

Cost of asset = Down payment in cash + PV of note payable

= $14,000 + $38,958

= $52,958

a) Journal entry to record the purchase on January 1, 2020

Description Debit Credit

Equipment $52,958

Discount on note payable $9,042

Cash $14,000

Notes Payable $48,000

b. Entry on December 31, 2020 to record Interest Expense

Interest expense = $9,042

For Year 1 = $9,042 / 2 = $4,521

Journal Entry

Description Debit Credit

Interest Expense $4,521.00

Discount on Notes Payable $4,521.00

Entry on December 31, 2020 to record Depreciation Expense

Depreciation based on Straight Line Method = (Cost of asset - SV) / Life of asset

= (52,958 - 0) /6

= $8,826

Journal Entry

Description Debit Credit

Depreciation $8,286

Equipment $8,286

c. Balance sheet presentation

Liabilities Amount ($)

Notes payable $48,000

Less: Discount on Notes ($4,521) $43,479

Assets

Fixed asset

Equipment $52,958

Less: Depreciation ($8,286) $44,672

d) Entry on December 31, 2021, to record interest expense

Journal Entry

Description Debit Credit

Interest Expense $4,521

Discount on Notes Payable $4,521

Entry on December 31, 2021, to record Depreciation

Journal Entry

Description Debit Credit

Depreciation $8,286

Equipment $8,286

Entry on December 31, 2021, to record payment of the note

Journal Entry

Description Debit Credit

Notes Payable $48,000

Cash $48,000

e Journal Entry

Description Debit Credit

Equipment $54,000

Cash $14,000

Common stock* $10,000

Paid-in capital in excess of $30,000

par value-common stock

(To record the purchase of equipment)

Workings

Common stock = 1,000 shares * $10 = $10,000

**Paid-in capital in excess of par value-common stock = [1000 x ($40 - $10)] = 1000 x $30 = $30000

Answer from: Quest

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Answer from: Quest

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Recording Purchase of Equipment through Debt and Equity On January 1, 2020, Sidelines Company purcha...

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