On January 1, 2020, Cash poor Limited purchased equipment by signing a long-term note payable in the amount of $100,000, maturing on December 31, 2022 (3 years), with a stated interest rate of 12%. The note will be repaid in three equal annual installments on account of principal and interest, with each installment due on December 31. The market rate of interest on debt instruments of a similar type was 14% on January 1, 2020. 

(a) Prepare the journal entries to record the purchase of the equipment and issuing of the Note Payable on January 1, 2020, and the first installment payment on December 31, 2020. (Remember – there are 2 steps required: 

(1) the cash payment and 

(2) the PV of the cash payments). 

(b) Assume that on January 1, 2021, Cash poor Limited was unable to continue making payments on the note due to financial difficulties and returned the equipment to the creditor as settlement of the balance owing. The equipment had a fair market value of $80,000 on January 1, 2021, and Cash poor Limited had recorded depreciation on the equipment on December 31, 2020, using the straight-line basis under the assumption that the service life was 10 years and the estimated salvage value was zero. Prepare the journal entry on the books of Cash poor Limited to record the settlement of the debt.