Question

WILL RATE FAST:

P14.8B (LO 3) (Entries for Zero-Interest-Bearing Note) On December 31, 2020, Payson Company acquired a press from Sugar Corporation by issuing a $400,000 zero-interest-bearing note, payable in full on December 31, 2023. Payson's credit rating permits it to borrow funds from its several lines of credit at 8%. The press is expected to have a 6-year life and a $40,000 salvage value. Round amounts to the nearest dollar. Instructions (a) Prepare the journal entry for the purchase on December 31, 2020. (b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective- interest method) on December 31, 2021. (c) Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2022.

Answer 1

Requirement (a):

Date	Account title and Explanation	Debit	Credit
Dec 31,2020	Equipment	$317,532
	Notes payable*		$317,532
	[To record purchase of equipment in exchange of note]

*Notes payable = Face value of the notes x Present value factor (8%, 3 Years) = $380,000 x 0.79383 = $317,532

Requirement (b):

Date	Account title and Explanation	Debit	Credit
Dec 31,2021	Interest expense [317,532 x 8%]	$25,403
	Notes payable		$25,403
	[To record interest expense]
Dec 31,2021	Depreciation expense*	$46,255
	Accumulated depreciation-equipment		$46,255
	[To record depreciation expense]

Requirement (c):

Date	Account title and Explanation	Debit	Credit
Dec 31,2022	Interest expense [(317,532+25,403) x 8%]	$27,435
	Notes payable		$27,435
	[To record interest expense]
Dec 31,2022	Depreciation expense*	$46,255
	Accumulated depreciation-equipment		$46,255
	[To record depreciation expense]

*Depreciation expense = (Cost - Salvage value) ÷ Useful life = (317,532-40,000)/6 = $46,255