To meet customer demand for its product, Armada Inc. decided to purchase equipment from Southern Ontario Industries on January 2, 2012, and expand its production capacity. Armada issued an $800,000, five-year, non–interest-bearing note to Southern Ontario Industries for the new equipment when the prevailing market interest rate for obligations of this nature was 12%. The company will pay off the note in five $160,000 instalments that are due at the end of each year over the life of the note.
Instructions
(a) Prepare the journal entry(ies) at the date of purchase. (Round to nearest dollar in all calculations.)
(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the com- pany uses the effective interest method.
(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.