Question

Whispering Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Whispering issues a(n) $832,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 11%. The company will pay off the note in five $166,400 installments due at the end of each year over the life of the note.

Prepare the journal entry at the end of the second year to record the payment and interest. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

	Debit	Credit
Notes Payable	166400
Interest Expense	56787
Discount on Notes payable		56787
Cash		166400
Workings:
Present value of notes payable = 166400*3.69590= $614998
Note: PV factor of $ 1 annuity for 5 years at 11% is 3.69590
Interest Expense Year 1 = 614998*11%= $67650
Carrying value of note at the end of Year 1= 614998-(166400-67650)= $516248
Interest Expense Year 2 = 516248*11%= $56787