Problem: Cardinals Co purchased some equipment on 12/31/05 by issuing a $525,000, 3%, 5-year note calling for 5 equal annual payments, the first of which to be made on 12/31/06. The appropriate rate of interest for this type of activity is 10%. Since this is a below market interest note, the net method of recording is utilized.
Compute the:
1) annual payment amount
2) amount debited to the equipment account
3) amount of liability considered current at 12/31/06
4) amount of liability considered long-term at 12/31/07
5) total amount of interest expense reported during the 3 years ending 12/31/09