Fold and Hold Corporation purchased a machine which had a current cash equivalent cost of $38,971 on January 1,2010.Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the balance,payable in six equal annual installments on each December 31 beginning with December 31,2010.The note specified a 10% interest rate on the unpaid balance.
Requirements:
A.Prepare the journal entry to record the purchase on January 1, 2010 (round to the nearest dollar).
B.Prepare the entry to record the first installment payment on December 31, 2010 (round to the nearest dollar).Assume that no adjusting entries have been made during the year.

Question

Quizplus · Accepted Answer

When Fold and Hold Corporation purchases the machine, the company needs to record the purchase by debiting the asset account for the machine and crediting both the cash account and the notes payable account. The cash account is credited for the down payment, and the notes payable account is credited for the balance of the purchase price, which will be paid off in installments.
Here's the journal entry:
```
Date          Account Title            Debit       Credit
January 1, 2010
  Machinery                           38,971
    Cash                                           10,000
    Notes Payable                                  28,971
```
- Machinery is debited for the full purchase price of the machine, $38,971.
- Cash is credited to reflect the cash payment made, $10,000.
- Notes Payable is credited for the remaining balance that will be paid in installments, $28,971.
B. Entry to Record the First Installment Payment on December 31, 2010
The first installment payment will include both the principal repayment and the interest expense for the year. The interest for the year is calculated on the unpaid balance of the note. Since no payments have been made yet, the interest for the first year is calculated on the full amount of the note payable, $28,971.
Interest for one year at 10%:
Interest = Principal x Rate x Time
Interest = $28,971 x 10% x 1
Interest = $2,897.10 (rounded to the nearest dollar, $2,897)
The total annual installment payment is not given, but we can calculate the principal portion of the payment by subtracting the interest from the total payment. Since the payments are equal annual installments, we divide the principal amount by the number of payments (6) to find the principal portion of each installment.
Principal portion of each installment:
Principal portion = Total principal / Number of installments
Principal portion = $28,971 / 6
Principal portion = $4,828.50 (rounded to the nearest dollar, $4,829)
Now, we can record the first installment payment:
```
Date          Account Title            Debit       Credit
December 31, 2010
  Interest Expense                     2,897
  Notes Payable                        4,829
    Cash                                            7,726
```
- Interest Expense is debited for the interest for the year, $2,897.
- Notes Payable is debited to reflect the reduction in the liability for the principal portion of the installment, $4,829.
- Cash is credited to show the cash outflow for the installment payment, which is the sum of the interest and principal portions, $7,726.
Please note that the total annual installment payment should be provided to accurately determine the principal and interest portions. If the installment payment amount is different from the sum of the calculated interest and principal portions, the entries would need to be adjusted accordingly.

Fold and Hold Corporation Purchased a Machine Which Had a Current