On January 1, 2024, a company purchases new equipment for $677,000. The company is required to make a down payment of $129,000 and issue an installment note for the remaining balance of $548,000. The note requires payments of $74,807.37 every three months, beginning March 31, 2024, over the next two years. The interest rate on the note is 8% annually (or 2% every three months). Required:1. Record the purchase of equipment with down payment of $129,000 and the installment note of $548,000 on January 1, 2024.2. Record the first payment of $74,807.37 on March 31, 2024.(If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Question
On January 1, 2024, a company purchases new equipment for 129,000 and issue an installment note for the remaining balance of 74,807.37 every three months, beginning March 31, 2024, over the next two years. The interest rate on the note is 8% annually (or 2% every three months). Required:1. Record the purchase of equipment with down payment of 548,000 on January 1, 2024.2. Record the first payment of $74,807.37 on March 31, 2024.(If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. Round your answers to 2 decimal places.)
Solution
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The purchase of the equipment on January 1, 2024, would be recorded as follows:
Debit Equipment 129,000 Credit Notes Payable $548,000
This entry records the purchase of the equipment and the payment of the down payment in cash. The remaining balance is recorded as a liability (Notes Payable).
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The first payment on March 31, 2024, would be recorded as follows:
Debit Interest Expense 548,000 * 2%) Debit Notes Payable 74,807.37 - 74,807.37
This entry records the payment of the installment. The payment is split into two parts: the interest expense and the reduction of the liability (Notes Payable). The interest expense is calculated based on the outstanding balance of the note and the interest rate. The remaining amount is used to reduce the liability.
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