Question

On January 1, 2016, Billips Corporation purchased equipment having a fair value of $72,054.94 by issuing a $90,000 note, payable in three $30,000 annual installments beginning December 31, 2016.

Required:

Prepare (1) the journal entry to record the purchase of the equipment, (2) a schedule to compute the annual interest expense, and (3) the journal entries to record yearly interest expense and note repayments over the life of the note.

Answer 1

S.NO	Date	Account title	Debit	credit
1	Jan 1 2016	Equipment	72054.94
		Discount on note payable[90000-72054.94]	17945.06
		Note payable		90000
		[Being equipment purchased for note ]

2)Discount to be amortized each year = 17945.06/3= 5981.69

Period ended	Interest expense	Balance in discount on note payable
31 Dec 2016	5981.69	17945.06-5981.69= 11963.37
2017	5981.69	11963.37-5981.69= 5981.68
2018	5981.68** (round off)	0

3)

Date	Account title	Debit	credit
31 dec 2016	Interest expense	5981.69
	Discount on note payable		5981.69
	Note payable	30000
	cash		30000
31 dec 2017	Interest expense	5981.69
	Discount on note payable		5981.69
	Note payable	30000
	cash		30000
31 dec 2018	Interest expense	5981.68
	Discount on note payable		5981.68
	Note payable	30000
	cash		30000