Respuesta :
Answer and Explanation:
Transaction in the books of purchaser of equipment
Face value of zero interest bearing notes issued $240,000
Maturity period 3 years
Prevailing rate of interest for such type of notes 5%
PVF for 3rd year at 10 % 0.864
Present Value of Notes on Jan , 01 2014 $207,360
($240,000 × 0.864)
Discount on notes $32,640
($240,000 - $207,360)
Present value of notes will be the capitalized value of equipment
Discount Amortization and interest expense schedule
Opening Effective interest Discount Amortization of
Balance at 5% Amortization balance (equal to interest expense)
a b a + b
$207,360 $10,368 $217,728 $10,368
$217,728 $10,886 $228,614 $10,886
$228,614 $11,426 $240,000 $11,426
a. Jan,1 2014
Equipment Dr, $207,360
Discount on Issue of notes Dr, $32,640
To Notes Payable $240,000
(Being issue of notes and purchase of equipment is recorded)
b. Dec 31,2014
Interest Expense Dr, $10,368
To Discount on issue of notes $10,368
(Being the interest expense and amortization of discount is recorded)
c. Dec 31, 2015
Interest Expense Dr, $10,886
To Discount on issue of notes $10,886
(Being the interest expense and amortization of discount is recorded)
d. Dec 31,2016
Interest Expense Dr, $11,426
Notes Payable Dr, $240,000
To Discount on issue of notes $11,426
To Cash $240,000
(Being the interest expense and amortization of discount, and liability of notes payable repaid is recorded)
e. Jan,1 2014
Notes Receivable Dr, $207,360
To Equipment $150,000
To Gain on sale of equipment $57,360
(Being the sale of equipment against zero interest bearing notes receivable is recorded)
f. Dec 31,2014
Notes Receivable Dr, $10,368
To Interest income on notes receivable $10,368
(Being the interest income at year end is recorded)
g. Dec 31, 2015
Notes Receivable Dr, $10,886
To Interest income on notes receivable $10,886
(Being the interest income at year end is recorded)
h. Dec 31,2016
Notes Receivable Dr, $11,426
To Interest income on notes receivable $11,426
(Being the interest income at year end is recorded)
i. Dec 31,2016
Cash Dr, 240,000
To Notes Receivable $240,000
(Being Notes receivable matured and cash received is recorded)
