On April 1, 2019, Bradley Company took out a $2 million bank loan at 6% annual interest. The loan was used to purchase manufacturing equipment, and the equipment was used as collateral for the bank loan. Bradley Company has a December 31st fiscal year-end.

The equipment cost $1.8 million from the manufacturer + $50,000 in non-refundable sales tax, and Bradley Co. paid another $100,000 for installation and testing. The equipment was put into use on May 1, 2019. It is expected to be used for 10 years and have a residual (salvage) value of $70,000.

REQUIRED:

1. (6 marks) Explain two reasons why Bradley Company would agree to use the equipment as collateral on the bank loan, and explain one risk to Bradley Company in doing so.

2. (4 marks) Over what time period do you think Bradley Company should repay the bank loan? Explain your reasoning.

3. (5 marks) The company will use a 20% diminishing balance method for depreciation of the equipment. Calculate the depreciation expense for each of 2019 and 2020. (Show your calculations)

4. (5 marks) Bradley Company sells the equipment on January 1, 2021 for cash of $1.1 million. Provide the journal entry to record the sale. (Show any supporting calculations)