Question

Kingbird Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2020, to expand its production capacity to meet customers' demand for its product. Kingbird issues a(n) $400.000.5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $80,000 installments due at the end of each year over the life of the note. Prepare the journal entry at the date of purchase. (Round factor values to 5 decimal places, eg. 1.25124 and final answers to account titles and enter Ofor the amounts.) decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the Account Titles and Explanation Debit Credit Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (Round answers to O decimal places, eg. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry"for the account titles and enter Ofor the amounts.) Account Titles and Explanation Debit Credit Prepare the journal entry at the end of the second year to record the payment and interest. (Round answers to O decimal places, eg. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter for the amounts.) Account Titles and Explanation Debit Credit Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.) (Round answers to O decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Step-1: Calculate the present value of the Notes payable

PV of notes payable = Installment paid x PV annuity factor at 12% for 5 years

= $80,000 x 3.60478

= $288,382

Step-2: Prepare Schedule Note Discount Amortization

Date	Cash Paid	Interest Expense	Discount Amortized	Carrying amount of Note
01/02/2020				$288,382
12/31/2020	$80,000	$34,606	$45,394	$242,988
12/31/2021	$80,000	$29,159	$50,841	$192,147
12/31/2022	$80,000	$23,058	$56,942	$135,204
12/31/2023	$80,000	$16,224	$63,776	$71,429
12/31/2024	$80,000	$8,571	$71,429	$0

1. Beginning carrying amount = Preset value of the notes payable
2. Cash paid = Installment paid every year
3. Interest expense = Preceding 'Carrying amount of Note' x 12%
4. Discount amortized = Cash paid - Interest expense
5. Carrying amount of Note = Preceding carrying amount of note - Discount amortized

Step-3: Calculation of Depreciation expense on Equipment

Depreciation expense = (Cost - Salvage value) ÷ Useful life

= ($288,382 - 0)/10 Years

=$28,838

Journal Entries:

Date	Account title and explanation	Debit	Credit
01/02/2020	Equipment	$288,382
	Discount on Notes Payable	$111,618
	Notes payable		$400,000
	[To record purchase of equipment in exchange of note]
12/31/2020	Notes payable	$90,788
	Interest expense	$34,606
	Discount on notes payable		$45,394
	Cash		$80,000
	[To record the payment and interest at the end of the first year]
12/31/2021	Notes payable	$101,683
	Interest expense	$29,159
	Discount on notes payable		$50,841
	Cash		$80,000
	[To record the payment and interest at the end of the first year]
12/31/2020	Depreciation expense	$28,838
	Accumulated depreciation-equipment		$28,838
	[To record first year's depreciation expense on equipment]