SuMar Company purchased a new piece of machinery by paying $2,000 down and agreeing to pay $1,000 at the end of each year for 5 years. The appropriate interest rate is 8%.

Required:

1.	What is the cost of the machinery? What is the present value of the liability at the time of the purchase?
2.	Prepare the journal entry to record the purchase of the machinery and the associated liability on SuMars balance sheet.
3.	Prepare a table that shows the interest and ending balance of the liability each year.

Chart of Accounts

CHART OF ACCOUNTS

SuMar Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Machinery
182	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
221	Notes Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

General Journal

Prepare the journal entry to record the purchase of the machinery on January 1. Additional Instruction

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Analysis

Additional Instruction

What is the cost of the machinery?

What is the present value of the liability at the time of the purchase?

Note Schedule

Prepare a table that shows the interest and ending balance of the liability each year. Additional Instruction

Period	Beginning Balance	Interest	Cash Payment	Ending Balance
1
2
3
4
5

Present Value Table

Table 4 - Present Value of an Ordinary Annuity of 1: pO,n,i=11(1 + i)nipO,n,i=11(1 + i)ni

n	1.5%	4.0%	4.5%	5.0%	5.5%	6.0%	7.0%	8.0%	9.0%	10.0%	12.0%	14.0%	16.0%	18.0%
1	0.985222	0.961538	0.956938	0.952381	0.947867	0.943396	0.934579	0.925926	0.917431	0.909091	0.892857	0.877193	0.862069	0.847458
2	1.955883	1.886095	1.872668	1.859410	1.846320	1.833393	1.808018	1.783265	1.759111	1.735537	1.690051	1.646661	1.605232	1.565642
3	2.912200	2.775091	2.748964	2.723248	2.697933	2.673012	2.624316	2.577097	2.531295	2.486852	2.401831	2.321632	2.245890	2.174273
4	3.854385	3.629895	3.587526	3.545951	3.505150	3.465106	3.387211	3.312127	3.239720	3.169865	3.037349	2.913712	2.798181	2.690062
5	4.782645	4.451822	4.389977	4.329477	4.270284	4.212364	4.100197	3.992710	3.889651	3.790787	3.604776	3.433081	3.274294	3.127171
6	5.697187	5.242137	5.157872	5.075692	4.995530	4.917324	4.766540	4.622880	4.485919	4.355261	4.111407	3.888668	3.684736	3.497603
7	6.598214	6.002055	5.892701	5.786373	5.682967	5.582381	5.389289	5.206370	5.032953	4.868419	4.563757	4.288305	4.038565	3.811528
8	7.485925	6.732745	6.595886	6.463213	6.334566	6.209794	5.971299	5.746639	5.534819	5.334926	4.967640	4.638864	4.343591	4.077566
9	8.360517	7.435332	7.268790	7.107822	6.952195	6.801692	6.515232	6.246888	5.995247	5.759024	5.328250	4.946372	4.606544	4.303022
10	9.222185	8.110896	7.912718	7.721735	7.537626	7.360087	7.023582	6.710081	6.417658	6.144567	5.650223	5.216116	4.833227	4.494086
11	10.071118	8.760477	8.528917	8.306414	8.092536	7.886875	7.498674	7.138964	6.805191	6.495061	5.937699	5.452733	5.028644	4.656005
12	10.907505	9.385074	9.118581	8.863252	8.618518	8.383844	7.942686	7.536078	7.160725	6.813692	6.194374	5.660292	5.197107	4.793225
13	11.731532	9.985648	9.682852	9.393573	9.117079	8.852683	8.357651	7.903776	7.486904	7.103356	6.423548	5.842362	5.342334	4.909513
14	12.543382	10.563123	10.222825	9.898641	9.589648	9.294984	8.745468	8.244237	7.786150	7.366687	6.628168	6.002072	5.467529	5.008062
15	13.343233	11.118387	10.739546	10.379658	10.037581	9.712249	9.107914	8.559479	8.060688	7.606080	6.810864	6.142168	5.575456	5.091578
16	14.131264	11.652296	11.234015	10.837770	10.462162	10.105895	9.446649	8.851369	8.312558	7.823709	6.973986	6.265060	5.668497	5.162354
17	14.907649	12.165669	11.707191	11.274066	10.864609	10.477260	9.763223	9.121638	8.543631	8.021553	7.119630	6.372859	5.748704	5.222334
18	15.672561	12.659297	12.159992	11.689587	11.246074	10.827603	10.059087	9.371887	8.755625	8.201712	7.249670	6.467420	5.817848	5.273164
19	16.426168	13.133939	12.593294	12.085321	11.607654	11.158116	10.335595	9.603599	8.950115	8.364920	7.365777	6.550369	5.877455	5.316241
20	17.168639	13.590326	13.007936	12.462210	11.950382	11.469921	10.594014	9.818147	9.128546	8.513564	7.469444	6.623131	5.928841	5.352746
21	17.900137	14.029160	13.404724	12.821153	12.275244	11.764077	10.835527	10.016803	9.292244	8.648694	7.562006	6.686957	5.973139	5.383683
22	18.620824	14.451115	13.784425	13.163003	12.583170	12.041582	11.061240	10.201044	9.442425	8.771540	7.644646	6.742944	6.011326	5.409901
23	19.330861	14.856842	14.147775	13.488574	12.875042	12.303379	11.272187	10.371059	9.580207	8.883218	7.718434	6.792056	6.044247	5.432120
24	20.030405	15.246963	14.495478	13.798642	13.151699	12.550358	11.469334	10.528758	9.706612	8.984744	7.784316	6.835137	6.072627	5.450949
25	20.719611	15.622080	14.828209	14.093945	13.413933	12.783356	11.653583	10.674776	9.822580	9.077040	7.843139	6.872927	6.097092	5.466906
26	21.398632	15.982769	15.146611	14.375185	13.662495	13.003166	11.825779	10.809978	9.928972	9.160945	7.895660	6.906077	6.118183	5.480429
27	22.067617	16.329586	15.451303	14.643034	13.898100	13.210534	11.986709	10.935165	10.026580	9.237223	7.942554	6.935155	6.136364	5.491889
28	22.726717	16.663063	15.742874	14.898127	14.121422	13.406164	12.137111	11.051078	10.116128	9.306567	7.984423	6.960662	6.152038	5.501601
29	23.376076	16.983715	16.021889	15.141074	14.333101	13.590721	12.277674	11.158406	10.198283	9.369606	8.021806	6.983037	6.165550	5.509831
30	24.015838	17.292033	16.288889	15.372451	14.533745	13.764831	12.409041	11.257783	10.273654	9.426914	8.055184	7.002664	6.177198	5.516806