joebugandi
New member
jons inc. plans to acquire an addiotional machine on jan. 1, 2011 to meet the growing demand for its product. Simpson company offers to provide the machine to Jons using either of the options listed below (each option gives holmes exactly the same machine and gives simpson company approximately the same net present value cash equivalent at 10%)
option 1 - cash purchase $800,000
option 2 - installment purchase requiring 15 annual payments of $105,179 due december 31 each year.
the expected economic life of this machine to jons is 15 years. salvage value at that time is estimated to be $50,000. straight line depreciation is used. interest expense under option 2 is computed using the effective interest method.
Instructions:
based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the obligation should appear on the december 31, 2011 balance sheet of jons inc. for each option. For option 1, what is the account name and the amount under assets. what is the account name and amount for liabilities.
for option 2, what is the account name and the amount under assets. what is the account name and amount for liabilities.
option 1
option 1 - cash purchase $800,000
option 2 - installment purchase requiring 15 annual payments of $105,179 due december 31 each year.
the expected economic life of this machine to jons is 15 years. salvage value at that time is estimated to be $50,000. straight line depreciation is used. interest expense under option 2 is computed using the effective interest method.
Instructions:
based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the obligation should appear on the december 31, 2011 balance sheet of jons inc. for each option. For option 1, what is the account name and the amount under assets. what is the account name and amount for liabilities.
for option 2, what is the account name and the amount under assets. what is the account name and amount for liabilities.
option 1