Problem:
On January 1, 2014, Newell Manufacturing purchased a new drill press that had a cash purchase price of $6,340. Newell decided instead to pay on an installment basis. The installment contract calls for four annual payments of $2,000 each beginning in one year. Newell was not required to make an initial down payment for the drill press.
Required:
1. Verify that the imputed interest rate on the installment loan is 10%. That is, show that the present value of the payments Newell must make is $6,340 (rounded to the nearest dollar) when discounted at a 10% rate of interest.
2. What journal entry would Newell make on January 1, 2014, to record the drill press purchase?
3. How much interest expense would Newell record in 2014 for the installment loan? What would the loan balance be on January 1, 2015, after Newell made the first loan payment?
4. How much interest expense would Newell record in 2015 for the installment loan? What would the loan balance be on December 31, 2015—one day before Newell makes the second loan payment?