[nelson01]

Hi: I need help with the following: Hitech Industries purchases new electronic equipment for its telecommunications system. The contractual arrangement specifies 10 payments of $8600 each to be made over a 10-year period. If Hitech had borrowed money to buy the equipment, it would have have paid interest of 9%. Prepare the correcting acquisition entry, considering the implicit interest in the purchase. I came up with $13, 400 for a payment each year. The book is giving an answer of $30,808 - Debit to Discount on Notes Payable. Please assist me. Thanks

[morgaine300]

specifies 10 payments of $8600 each to be made over a 10-year period

It already gave you the payments. Why did you change them to 13,400? That also isn't the question the problem asked. Always read instructions carefully and look for what they want you to do. They didn't ask about the payments -- those are in the future. They're asking for the entry to record the purchase.

The payments are $8600 per year. Period. But would you as a company allow someone to purchase something, get it now, and make payments for 10 years, without getting interest out of it? Probably not. So "implicit interest" is assuming that interest is "built into" those $8600 payments. 10 such payments will be $86,000. That includes the implicit interest, so part of that $86,000 is interest, with the rest being "principal." The "principal" in this case would be the cost of the equipment. The idea is figuring out what that is, based on an assumed interest of 9% per year.

In other words, what's the present value of 10 $8600 payments? What value exists today that would be the equivalent of 10 $8600 payments at 9% interest?

[tuija]

well actually if the answer is $ 30808 - then the question is not asking for the entry to record the purchase
it is asking what are the total interest payments made during the 10 years (as opposed to principal payments)
interest = $ 30,808
principal = $ 55,192
Total = $86,000

[morgaine300]

Thread is almost two years old.