Question

SuMar Company purchased a new piece of machinery by paying $2,000 down and agreeing to pay $1,000 at the end of each year for 5 years. The appropriate interest rate is 8%.

Required:

1.	What is the cost of the machinery? What is the present value of the liability at the time of the purchase?
2.	Prepare the journal entry to record the purchase of the machinery and the associated liability on SuMar’s balance sheet.
3.	Prepare a table that shows the interest and ending balance of the liability each year.

Prepare the journal entry to record the purchase of the machinery on January 1. Additional Instruction

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1	Jan 2	Machinery		5992.71
2		Cash			2000
3		Notes Payable			[???]

What is the cost of the machinery? [???]

What is the present value of the liability at the time of the purchase? [???]

Prepare a table that shows the interest and ending balance of the liability each year. Additional Instruction

Period	Beginning Balance	Interest	Cash Payment	Ending Balance
1	3992.71	319.42	[???]	3312.13
2	3312.13	264.94	[???]	2577.10
3	2577.10	206.17	[???]	[???]
4	[???]	142.66	[???]	925.97
5	925.93	74.07	[???]	0

Please help me with [???] part...

Answer 1

1)

Present value = Down payment + annuity

= (1-(1/(1+interest rate)^no. of years))/interest rate

= 2000+1000*(1-(1/(1+8%)^5))/8%

= 5992.71

2)

Date	Particulars	Debit ($)	Credit ($)
	Machinery	5992.71
	Cash/bank		2000
	Notes payable		3992
	(To record the purchase of machinery)

3)

Opening balance (a)	Equal monthly installment (b)	Towards interest c= a*8%	Cash Payment d= B-C	Closing balance e=a-d
3992.71	1000	319.42	680.58	3312.13
3312.13	1000	264.97	735.03	2577.1
2577.1	1000	206.17	793.83	1783.26
1783.26	1000	142.66	857.34	925.93
925.93	1000	74.07	925.93	0.00