Alden Trucking Company isreplacing part of their fleet of trucks by purchasing t

Question

Alden Trucking Company isreplacing part of their fleet of trucks by purchasing them under anote agreement with Kenworthy on January 1, 2009. The noteagreement will require $10 million in annual payments starting onDecember 31, 2009 and continuing for a total of five years (finalpayment December 31, 2013). Kenworthy will charge Alden themarket interest rate of 10% compounded annually.

21.  How muchwill Alden record as a debit to their equipment account and as acredit to their notes payable account on January 1,2009?

22.  How much ofthe first $10 million payment on December 31, 2009 isinterest?

23.  What is theremaining obligation on January 1, 2010 after the first payment hasbeen made?

Explanation / Answer

21 The Equipment Account will be debited by thePresent Value of Lease payments which are in the nature of ordinaryannuities. ( Hint : Use PV function in Excel Rate - 10% NPER - 5 PMT Minus 10 22 The Interest would be The amount obtained above * 0.10 23 Remaining Obligation PV obtained above - ( 10 - interest obtained above ) ALL THE BEST !!

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