Sterling Inc. has decided to purchase equipment from Central Industries on January 2, 2022, to expand its production capacity to meet customers’ demand for its product. Sterling issues a $900,000, 5 year, zero-interest-bearing note to Central for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $180,000 installments due at the end of each year over the life of the note.

Instructions

a. Prepare the journal entry or entries at the date of purchase. Round to nearest dollar in all computations.

b. Prepare the journal entry or entries at the end of the first year to record the payment and interest, assuming that the company employs the effective interest method.

c. Prepare the journal entry or entries at the end of the second year to record the payment and interest. 

d. Assuming that the equipment had a 10-year life and no residual value, prepare the journal entry necessary to record depreciation in the first year. Straightline depreciation is employed.