Question

On March 31, 2017, Etzikom Inc. (Etzikom) purchased a corporate jet from the manufacturer for $3,750,000. Etzikom paid $250,000 in cash to the manufacturer and received a four-year, $3,500,000, interest-free loan for the remainder of the purchase price. The terms of the loan require Etzikom to pay the manufacturer $875,000 on March 31 of each of the next four years, beginning on March 31, 2018. Assume a discount rate of 5 percent when responding to the following questions.

Required:
a. Prepare the journal entry that Etzikom should make to record the purchase of the jet. Explain the amount you have recorded for the jet on the balance sheet.
b. Prepare the journal entries that Etzikom should make on March 31, 2017 through 2021 to record payments on the loan.
c. How much should Etzikom report as a liability for the loan on its balance sheet on March 31, 2017 through 2021?
d. Could Etzikom record the liability at $3,500,000 on March 31, 2017? What are the problems of accounting for the liability this way?



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  • CreatedFebruary 26, 2015
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