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  • Audit Liability 11 Chapter 7

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    Ma Teresa B. Cerezo
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    Ohrid Company purchased machinery on December 31, 2010 for $262,241, paying $80,000 down and agreeing to pay the balance of $182,241 in four equal annual installments of $60,000 plus 12% implied interest. The interest expense reported on Ohrid's 2011 income statement is $21,869. The carrying value of the note as of December 31, 2012 is $101,403.

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    Ohrid Company purchased machinery on December 31, 2010 for $262,241, paying $80,000 down and agreeing to pay the balance of $182,241 in four equal annual installments of $60,000 plus 12% implied interest. The interest expense reported on Ohrid's 2011 income statement is $21,869. The carrying value of the note as of December 31, 2012 is $101,403.

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    994 views1 page

    Audit Liability 11 Chapter 7

    Uploaded by

    Ma Teresa B. Cerezo
    Ohrid Company purchased machinery on December 31, 2010 for $262,241, paying $80,000 down and agreeing to pay the balance of $182,241 in four equal annual installments of $60,000 plus 12% implied interest. The interest expense reported on Ohrid's 2011 income statement is $21,869. The carrying value of the note as of December 31, 2012 is $101,403.

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    of 1

    PROBLEM 7-11

    Accounting for Noninterest-bearing Note


    (Payable in Installments)
    OHRID COMPANY purchased machinery on December 31,2010, paying
    P80,000 down and agreeing to pay the balance in four equal
    installments of P60,000 payable each December 31. Implicit in the
    purchase price is an assumed interest of 12%.
    The following data are abstracted from the present value tables:
    Present value of 1 at 12% for 4 periods
    0.63552
    Present value of an ordinary annuity of 1 at 12%
    for 4 periods
    3.03735
    1. What is the cost of the machinery purchased on December
    31,2010?
    A. P233,083 C. P262,241
    B. P320,000 D. P290,842
    2. How much interest expense should be reported on Ohrid’s
    income statement for the year ended December 31,2011?
    A. P38,131 C. P17,293
    B. P21,869 D. P42,707
    3. What is the carrying value of the note at December 31,2012?
    A. P120,000 C. P99,310
    B. P144,110 D. P101,403
    SOLUTION 7-11
    1. Down payment P80,000
    Present value of installment payments
    (P60,000x3.03735) 182,241
    Cost of machinery P262,241
    Answer: C
    2. Interest expense for 2011(see amortization schedule) P21,869
    Answer: B
    3. Carrying value of note at Dec. 31,2012
    (see amortization schedule) P101,403
    Answer: D
    SCHEDULE OF NOTE DISCOUNT AMORTIZATION
    Date Payment Discount Carrying
    Amortization Value of
    note
    12.31.10 P182,241
    12.31.11 P60,000 P21,8691 144,1102
    12.31.12 60,000 17,293 101,403
    12.31.13 60,000 12,168 53,571
    12.31.14 60,000 6,429 0
    1 P21,869 = P182,241 x 12%
    2 P144,110 = P182,241 – P60,000 + P21,869

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