Purpose: This exercise will give you practice in accounting for the acquisition of a plant asset on a deferred payment plan.
Starstruck, Inc. purchased a computer network on December 31, 2014 for $200,000, paying $50,000 down and agreeing to pay the balance in five equal installments of $30,000 payable each December 31 beginning in 2015. An assumed interest rate of 10% is implicit in the purchase price and is the market rate of interest.
Instructions (Round to the nearest cent)
(a) Prepare the journal entry(ies) at the date of purchase.
(b) Prepare an amortization schedule for the installment agreement.
(c) Prepare the journal entry(ies) at December 31, 2015, to record the cash payment and the applicable interest expense (assume the effective interest method is employed).
(d) Prepare the journal entry(ies) at December 31, 2016, to record the cash payment and the applicable interest expense (assume the effective interest method is employed).