Can someone else answer this...please Emmett & Gracie (E & G) is considering a s
ID: 2422301 • Letter: C
Question
Can someone else answer this...please
Emmett & Gracie (E & G) is considering a significant equipment replacement. E & G would like to replace some of their equipment before December 31, 2016. The equipment originally cost $840,000 and the equipment’s accumulated depreciation balance at the end of 2015 is will be $790,000. At this point the equipment is depreciated to its salvage value.Your long-term asset accountant, Joe, tells you about this equipment option 3 as follows:
3. purchase new equipment that is more efficient and sell the old equipment, The estimated life of any new equipment is 7 years.
E & G would like you to analyze option 3 to determine the financial impact of this decision and any non-financial considerations that may result from this decision. Additional information about option 3 is presented below:
Option 3: Purchase the new equipment by giving a non-interest-bearing note with five payments of $199,000 to the supplier (starting on the first day of note’s term and each year thereafter) and selling the old equipment for $60,000 cash. The first $199,000 payment would be made in late December 2016. The prevailing interest rate for obligations of this nature is 10%.
Instructions: (A) Prepare jounral entries in general journal form for option 3 and (B) explain on how option 3 affects the finacial statments and the strengths and weaknesses of this option.
Explanation / Answer
Present value of non-interest bearing note payable is calculated using present value formula of annuity:
P = (PMT [(1 - (1 / (1 + r)n)) / r]) x (1+r)
Where
P = The present value of the annuity stream to be paid in the future
PMT = The amount of each annuity payment
r = The interest rate
n = The number of periods over which payments are made
= 199000[(1 - (1 / (1 + 0.10)5)) / r=o.10]) x (1+0.10)
$823,420.94
B assets will be increased with corresponding increase in liability.
Strength- Firm have highly efficient equipment instead of old equipment.
Depreciation can be claimed on newequipment.
Weakness: firm liability will increase resulting in lower earning
Journal Date Description Debit Credit a Equipment a/c $ 823,421 Discount on notes payable $ 171,579 Notes payable-10% $ 995,000 b cash $ 60,000 gain on sale of old equipment $ 10,000 old equipment $ 50,000