Question

willie Winn Track Shoes acquired a machine from Betty Will Corporation. Betty Will completed construction of the machine on January 1, 2021. In payment for the $12 million machine, Willie Winn issued a 5-year installment note to be paid in five equal payments at the end of each year. The payments include interest at the rate of 10%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1). (Use appropriate factor(s) from the tables provided.)

Required:

1. Prepare the journal entry for Willie Winn's purchase of the machine on January 1, 2021.

2. Prepare the journal entry for the first installment payment on December 31, 2021.

Answer 1

Date	Account titles and explanation	Debit	Credit
01-Jan-21	Equipment (machine)	$12,000,000
	Note payable		$12,000,000
	(equipment purchased by issuing note)
31-Dec-21	Note payable	$1,965,575		(3,165,575-1,965,575)
	Interest expense	$1,200,000		(12,000,000*10%)
	Cash		$3,165,575
	(first payment recorded)
	Present value annuity factor for 10% for 5 years	3.79078
	Loan amount		$12,000,000
	Equated yearly amount		$3,165,575	(12,000,000/3.79078)