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6 June, 13:39

Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2009. The note agreement will require $10 million in annual payments starting on December 31, 2009 and continuing for a total of five years (final payment December 31, 2013). Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually.

Required:

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

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

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

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Answers (1)
  1. 6 June, 13:40
    0
    1. $37,907,868

    2. $3,790,787

    3. $31,698,654

    Explanation:

    The cost of the trucks according to IAS 16, is the amount of cash or cash equivalent paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition.

    Thus=, we need to find the Fair Value or Present Value of the Note as Follows:

    Pmt = $10,000,000

    P/yr = 1

    i = 10%

    N = 5

    Pv = ?

    Pv = 37,907,868

    Therefore Alden will record $37,907,868 as a debit to their equipment account and as a credit to their notes payable

    Interest on First Payment = $37,907,868*10%

    = $3,790,787

    Remaining Obligation = $37,907,868 - $6,209,213 (Capital Portion) - $3,790,787 (Interest Portion)

    = $31,698,654
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