Recording Purchase of Equipment through Debt and Equity

On January 1, Vale Inc. acquires equipment with a 10-year useful life by issuing a two-year, zero-interest bearing installment note payable. The market rate is 14% for similar transactions. Terms are $11,200 cash payment immediately plus payments of $8,000 cash at the end of each of the next two years. The company uses the effective interest method to amortize any discount on note payable and the straight-line method to record depreciation expense.

Required

a. Prepare the entry to record the purchase of this equipment. b. Prepare the entry at the end of year one for (1) interest accrual, (2) cash payment, and (3) depreciation expense. c. Prepare the entry at the end of year two for (1) interest accrual, (2) cash payment, and (3) depreciation expense. d. Assume instead that Vale exchanged 160 shares of its own $1 par common stock along with $11,200 cash for the equipment. The stock was not actively traded, but the equipment was estimated to have a fair value at the date of acquisition of $25,600. Prepare the entry to record the purchase.

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