Question

Larkspur 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. Larkspur issues a(n) $912,000, 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 $182,400 installments due at the end of each year over the life of the note.
a
Prepare the journal entry at the date of purchase. (Round factor values to 5 decimal places, e.g. 1.25124 and final 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.)
Account Titles and Explanation				Debit	Credit
	equipment			$674,132
	discount on note payable			$237,868
	note payable				912000
b
Prepare the journal entry at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method. (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.)
	note payable			182400
	interest on notes payable			$74,154
	cash				182400
	discount on notes payable				$74,154
c
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.)
	note payable			182400
	interest on notes payable			?
	cash				182400
	discount on notes payable ? c.? Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.) (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

	Date	Account and Explanation	Debit	Credit
a		Equipment	$674,132
		Discount on note payable		$237,868
		Note payable		912000
		To record Purchase of equipment)
b		Note payable	182400
		Interest on notes payable	$74,154
		cash		182400
		discount on notes payable		$74,154
c		Note payable	182400
		Interest on notes payable	54091
		cash		182400
		discount on notes payable		54091
		(To record 2nd payment)
d		Depreciation Expense	$67,413
		Accumulated Depreciation - Equipment		$67,413
		(To record Depreciation expense)