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28 July, 00:20

The company purchased office equipment costing $8,000 by signing a 6% note. The Equipment has a 5 year life and no salvage value. The note requires monthly principal payments of $225 beginning on October 1st until the balance is paid.

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  1. 28 July, 01:28
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    Equipment 8,000 debit

    Note Payable 8,000 credit

    --to record signing of a note in exchange of equipment--

    interest expense 40 debit

    note payable 225 debit

    cash 265 credit

    --to record first payment

    interest expense 38.88 debit

    note payable 225 debit

    cash 263.88 credit

    --to record second payment

    Explanation:

    singing of the note:

    we enter the equipment (assets) and the promissory note we signed (liability)

    at each payment:

    we calculate the carrying value times monthly rate to know interest

    Then, we add the principal payment to know the total quota:

    monthly rate: 6% annual divide by 12 months per year: 0.5% monthly rate

    first payment:

    8,000 x 0.005 = 40 interest expense

    + 225 principal amortization

    265 cash disbursements

    second payment:

    carrying value: 8,000 - 225 amortization = 7,775

    7,775 x 0.005 = 38.88

    cash disbursment: 38.88 + 225 = 263.88
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