Recording Purchase of Equipment through Debt and Equity

On January 1 of the current year, Sidelines Company purchases equipment with an estimated 6-year useful life by making a $18,200 cash payment and issuing a noninterest-bearing note for $62,400 due in two years. The fair value of the equipment is unknown. An 11% annual interest rate is typical of this transaction. The company uses the effective interest method to amortize any discount on note payable and the straight-line method to determine depreciation expense.

Required

a. Prepare the entry to record the purchase on January 1 of the current year. b. Prepare the entry on December 31 of the current year to record (1) interest expense and (2) depreciation expense. c. Indicate what should be reported on the balance sheet related to this transaction as of December 31 of the current year. d. Prepare the entry on December 31 of the next year to record (1) interest accrual (2) cash payment, and (3) depreciation expense. e. Assume instead that Sidelines exchanged 1,300 shares of its own $10 par value common stock along with $18,200 cash for the equipment. At the date of the exchange, the stock was actively trading in the market at $40 per share. Prepare the entry to record the purchase of equipment.

• Purchase of Equipment with Debt
• Purchase of Equipment with Equity

Note: Round answers to the nearest whole number for the following questions.

a. Prepare the entry to record the purchase on January 1 of the current year.

Account NameDr.Cr.Jan. 1

Answer

Answer

Answer

Answer

To record equipment purchase.

b. Prepare the entry on December 31 of the current year to record (1) interest expense and (2) depreciation expense.

Account NameDr.Cr.1. Dec. 31

Answer

Answer

Account NameDr.Cr.2. Dec. 31

Answer

Answer

To record depreciation.

c. Indicate what should be reported on the balance sheet related to this transaction as of December 31 of the current year.

Balance SheetDec. 31, Year 1Assets:Equipment, net

Answer

Liabilities:Note payable, net

Answer

d. Prepare the entry on December 31 of the next year to record (1) interest accrual (2) cash payment, and (3) depreciation expense.

Account NameDr.Cr.1. Dec. 31, Year 2

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Answer

To record interest.2. Dec. 31, Year 2

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Answer

To record payment of note.3. Dec. 31, Year 2

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Answer

To record depreciation