Flint Inc. has decided to purchase equipment from Central Michigan Industries on

Question

Flint Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers' demand for its product. Flint issues a(n) $1,072,000, 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 $214,400 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, e.g. 1.25124 and final answers to 0 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 0 for the amounts.) 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 0 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 0 for the amounts.) Account Titles and Explanation Credit

Explanation / Answer

Solution:

Purchase cost of equipment = Present value of installment discounted at 12%

= $214400 * cumulative PV factor at 12% for 5 years

= $214,400 * 3.604776 = $772,864

Journal Entries - Flint Inc. Event Particulars Debit Credit 1 Equipment Dr $772,864.00          To Notes Payable $772,864.00 (Being equipment purchased at note issued) 2 Interest Expense Dr ($772,864*12%) $92,744.00 Notes Payable Dr $121,656.00               To Cash $214,400.00 (To record payment of installment and interest expense) 3 Interest Expense Dr[ ($772,864 - $121,656)*12%] $78,145.00 Notes Payable Dr $136,255.00               To Cash $214,400.00 (To record payment of installment and interest expense) 4 Depreciation Expense Dr $77,286.00               To Accumulated Depreciation $77,286.00 (To record depreciation on equipment)

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