A company buys a piece of equipment. The cash price (fair value) is $37,938. the company gives a three-year, interest-bearing note with a maturity value of $40,000. The note requires annual payments of 6% of face value, or $2,400 per year, payable at the end of each year. The interest rate implicit in the note is 8% per year.
Prepare an amortization schedule with carrying value start of year, interest expense for period, payment, interest added to carrying value, and carrying value end of year for each of the three years.
Next, prepare journal entries for the recording of the purchase and for the interest payment the first year.