Question

Problem #4: North Sea Drilling Co. purchased machinery on December 31, 2016, paying $100,000 down and agreeing to pay the balance in four equal installments of $125,000 payable each December 31. An assumed interest of 6% is implicit in the purchase price.

Instructions

Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates. Round amounts to the nearest dollar.

1. December 31, 2016.
2. December 31, 2017.     

Answer 1

Solution :

Fair value of machine = Down payment + Present valeue of installments

= $100,000 + $125,000 * Cumulative PV factor at 6% for 4 periods

= $100,000 + $125,000 * 3.46511

= $533,139

Journal Entries - North Sea Drilling Co
Date	Particulars	Debit	Credit
31-Dec-16	Equipment Dr	$533,139.00
	To Cash		$100,000.00
	To Notes Payable		$433,139.00
	(To record purchase of equipment)
31-Dec-17	Interest expense Dr	$25,988.00
	Notes payable Dr	$99,012.00
	To Cash		$125,000.00
	(To record installment payment)