Recording Purchase of Equipment through Debt and Equity On January 1, 2020, Sidelines Company purchases equipment with an estimated 6-year useful life by making a $14,000 cash payment and issuing a noninterset-bearing note for $48,000 due in two years. The fair value of the the equipment is unknown. An 11% annual interest rate is typical of this transaction. The company uses the effective interest method to amortize interest expense and the straight-line method to estimate depreciation expense. a. Prepare the entry to record the purchase on January 1, 2020.
b. Prepare the entry on December 31, 2020, to record (1) interest expense and (2) depreciation expense.
c. Indicate the balance sheet presentation related to this transaction as of December 31, 2020.
d. Prepare the entry on December 31, 2021, to record (1) interest expense and payment of the note and (2) depreciation expense.
e. Assume instead that Sidelines exchanged 1,000 shares of its own $10 par value common stock along with $14,000 cash for the equipment. At the date of the exchange, the stock was trading on the market at $40 per share. Prepare the entry to record the purchase of equipment.

We calculate PV of the non interest bearing note payable

PV = FV / (1 + i%)^n

When FV= $ 48,000, i = 11% n = 2years  

PV = 48,000 / (1+11%)^-2

PV = 48,000 / 1.11^-2

PV = 48,000 * 0.8116

PV =  38,957.8

PV = $38,958

Cost of asset = Down payment in cash + PV of note payable

= $14,000 + $38,958  

= $52,958

a) Journal entry to record the purchase on January 1, 2020  

Description                           Debit       Credit

Equipment                           $52,958

Discount on note payable  $9,042

Cash                                                        $14,000

Notes Payable                                        $48,000

b. Entry on December 31, 2020 to record Interest Expense

Interest expense = $9,042

For Year 1 = $9,042 / 2 = $4,521

                              Journal Entry

Description                                Debit         Credit

Interest Expense                    $4,521.00

Discount on Notes Payable                        $4,521.00

Entry on December 31, 2020 to record Depreciation Expense

Depreciation based on Straight Line Method = (Cost of asset - SV) / Life of asset

= (52,958 - 0) /6

= $8,826  

              Journal Entry

Description        Debit     Credit

Depreciation     $8,286

Equipment                        $8,286

c. Balance sheet presentation

Liabilities                           Amount ($)

Notes payable                  $48,000

Less: Discount on Notes  ($4,521)    $43,479

Assets

Fixed asset

Equipment                        $52,958

Less: Depreciation           ($8,286)    $44,672

d) Entry on December 31, 2021, to record  interest expense

                       Journal Entry

Description                               Debit      Credit

Interest Expense                      $4,521

Discount on Notes Payable                    $4,521

Entry on December 31, 2021, to record Depreciation

                Journal Entry

Description        Debit    Credit

Depreciation     $8,286

Equipment                       $8,286

Entry on December 31, 2021, to record payment of the note

                 Journal Entry

Description            Debit      Credit

Notes Payable    $48,000

Cash                                       $48,000

e                      Journal Entry

Description                           Debit      Credit

Equipment                            $54,000

        Cash                                                        $14,000

        Common stock*                                      $10,000

        Paid-in capital in excess of                    $30,000

        par value-common stock

  (To record the purchase of equipment)  

Workings

Common stock = 1,000 shares * $10 = $10,000

**Paid-in capital in excess of par value-common stock = [1000 x ($40 - $10)] = 1000 x $30 = $30000

answer; the correct answer should be (demonstrations); good luck