Sycamore Incorporated currently earns a steady income of $1,200,000 per year. Its managers are interested in acquiring a new piece of manufacturing equipment. The cost of the equipment is $10,000,000. It will allow Sycamore to manufacture a new product, which will generate additional cash income (before depreciation and debt service) of $2,600,000/year.

The purchase will be financed by an installment loan. The five-year loan will require payments of $2,504,565 at the end of each year. This represents an 8% interest rate.

The equipment will be depreciated straight-line over a five-year useful life, with no residual value. The asset will be purchased on January 1, Year 1.

1. Prepare the journal entries to record (1) issuing the note payable and (2) purchasing the asset.