Bian Inc. financed the purchase of equipment costing $85,000 on January 1, 2017 using a note payable.

Question:

Bian Inc. financed the purchase of equipment costing $85,000 on January 1, 2017 using a note payable. The

note requires Bian to make annual $23,971 payments of blended interest and principal on January 1 of the following four years, beginning January 1, 2018. The note bears interest at the rate of 5%.

Instructions:

a) Prepare the debt amortization schedule for the note over its term. Using a financial calculator or Excel, prove that the blended payment will cost Bian Inc. 5%.

b) Prepare the journal entry(ies) that are required for the year ended December 31, 2017 and the first instalment payment on January 1, 2018.

c) Prepare the statement of financial position presentation of the note at December 31, 2017 (include both the current and long-term portions) and any interest outstanding.

d) Prepare the statement of financial position presentation of the note at December 31, 2018 and any interest outstanding.

e) Redo part (c) assuming that the equipment was purchased on July 1, 2017 and the payments are due beginning July 1, 2018.

f) If the repayments in the note had been a fixed principal repayment each year, what would have been the amount of the annual principal payment? Prepare the debt amortization schedule for the note over its term.

g) Compare the interest costs for the term of the note with fixed payments in part (a) and with fixed principal repayment in part (f). Which has the highest interest costs?

h) You are the lender. Would you rather negotiate a note with fixed principal payments or fixed payments? Why?

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Related Book For  book-img-for-question

Intermediate Accounting

ISBN: 978-1119048541

11th Canadian edition Volume 2

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy

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