On December 31, 2013, Caliber Corporation purchased equipment by signing a $100,

Question

On December 31, 2013, Caliber Corporation purchased equipment by signing a $100,000 5 year 3% note payable, which required annual interest payments every December 31, Caliber Corporation's cost of capital was 10%. The equipment has a ten year life and is depreciated on a straight -line basis (zero salvage value.) A. Determine the present value of Caliber Corporation's cash flows for this note and prepare the Dec. 31, 2013 journal entry to record the purchase of the equipment. B. Prepare Caliber Corporation's amortization table for this note. C. Prepare the December 31, 2014 journal entries for the first interest payment and the depreciation of the equipment.

Explanation / Answer

As per policy, only four parts of a question is allowed to answer, so answering accordingly 5 parts :

A) Present value of Note = coupon * A/f(10%, 5) + Par value *F/f(10%,5) 100000*3%*3.791 + 100000 * 0.6209 = $73463 Journal Entry for Note issue on Dec 31, 2013: Debit Equipment $100,000 Credit Note Paybale 73463 Credit Discount on Note issue $26,537 B) Amortisation schedule: Date Interest paid Interest expense Dis. Amortised Carrying Value 12/31/2013 73463 12/31/2014 3000 7346 4346 77809 12/31/2015 3000 7781 4781 82590 12/31/2016 3000 8259 5259 87849 12/31/2017 3000 8785 5785 93634 12/31/2018 3000 9366 6366 100000 C) Journal entries on Dec 31, 2014 : Debit Interest Expense -1346 Debit Discount on Note issue 4346 Credit Cash 3000 (for interest paid) Debit Depreciation 10000 Credit Acc Dep - Eq. 10000 (for depreciation expense booked) D) Reported expense to the Income Statement 2014 : Interest expense = $ -1346 Depreciation expense = $10000 E) Reporting to balance sheet 2014: Assets: Equipment $100,000 Acc. Dep. - Eq. -10000 Liabilities: Note Payable $100,000 Discount on Note Issue ($22,191)

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