Non-interest-bearing Note Payable: Present Value
Response to the following problem:
On January 1, 2010, Northern Manufacturing Company bought a piece of equipment by signing a non-interest-bearing $80,000, one-year note. The face value of the note includes the price of the equipment and the interest. The effective interest rate is an annual rate of 16%, and the note is to be paid in four $20,000 quarterly installments. The price of the equipment is the present value of the four payments discounted at the effective interest rate.
Required
1. Prepare all journal entries to record the preceding information. Present value techniques should be used.
2. If Northern's financial statements were issued on June 30, 2010, what amount would the company report as notes payable?