Sabonis Cosmetics Inc. purchased machinery on December 31, 2011, paying $50,000 down and agreeing to pay the balance in four equal instalments of $40,000 that are payable each December 31. An assumed interest rate of 8% is implicit in the purchase price.
Instructions
(a) Prepare the journal entries that would be recorded for the purchase and for the payments and interest on December 31, 2011, 2012, 2013, 2014, and 2015.
(b) From the lender’s perspective, what are the advantages of an instalment note compared with an interest-bearing note?