Andrew Co., decided to purchase a new truck on January 2, 2017 and issues a $200

Question

Andrew Co., decided to purchase a new truck on January 2, 2017 and issues a $200,000, 4 year zero interest bearing note to the GMC Truck corporation when the prevailing rate of interest for similar notes is 6%. Andrew will make equal payments of $50,000 at the end of each year over the life of the note.

Required:

1)Calculate the amount that Andrew should value the truck.

2)Prepare the entry to record the purchase on January 1, 2017.

3)Prepare the entry to record the payment and interest at the end of the first (2017) and second (2018) years assuming the company uses the effective interest rate method.

Explanation / Answer

1) Amount that Andrew should value the truck = 50000*Present value annuity factor(6%,4)

= 50000*3.465 = 173250

2) Journal entry for purchase:

Fixed assets (Truck) Dr 173250

Note payable Cr 173250

3) Journal entry for the payment and interest at the end of the first (2017) :

Interest Expense Dr 10395 (173250*6%)

Note payable Dr 39605

Cash Cr 50000

Journal entry for the payment and interest at the end of second (2018) :

Interest Expense Dr 8019 (173250-39605)*6%

Note payable Dr 41981

Cash Cr 50000

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