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28 November, 12:09

On October 30, 2019, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The face value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%. Required: 1. Prepare all the journal entries required to record the preceding information including the year-end adjusting entry and any payments. Present value techniques should be used. 2. Show how the preceding items would be reported on the December 31, 2019, balance sheet.

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  1. 28 November, 12:33
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    the present value of the note payable:

    PV = payment x {1 - [1 / (1 + r) ⁿ]} / r

    payment = $6,000

    r = 16% / 4 = 4%

    n = 4

    PV = $6,000 x {1 - [1 / (1 + 0.04) ⁴]} / 0.04 = $21,779.37 ≈ $21,779

    October 30, 2019, machinery purchased

    Dr Machinery 21,779

    Dr Discount on notes payable 2,221

    Cr Notes payable 24,000

    Using the straight amortization method, the interest expense will be $555.25 per payment.

    December 31, 2019, accrued interest on notes payable

    Dr Interest expense 370

    Cr Interest payable 370

    January 31, 2020

    Dr Interest payable 370

    Dr Interest expense 185.25

    Dr Note payable 6,000

    Cr Discount on notes payable 555.25

    Cr Cash 6,000

    April 30, 2020

    Dr Interest expense 555.25

    Dr Note payable 6,000

    Cr Discount on notes payable 555.25

    Cr Cash 6,000

    July 31, 2020

    Dr Interest expense 555.25

    Dr Note payable 6,000

    Cr Discount on notes payable 555.25

    Cr Cash 6,000

    October 31, 2020

    Dr Interest expense 555.25

    Dr Note payable 6,000

    Cr Discount on notes payable 555.25

    Cr Cash 6,000

    On the December 31, 2019 balance sheet, the accounts should show:

    Assets:

    Machinery $21,779

    Liabilities:

    Note payable 24,000

    Discount on notes payable ($2,221)

    Interest payable $370

    Retained earnings ($370)
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