Amortize discounts using the effective interest rate method

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Reference no: EM13768015

On 1/1/2009, XYZ signed a 2 year, $6,000 non-interest note and received equipment form ABC Manufacturing. The equipment is estimated to be worth $5,144. Based on XYZ's credit history, a reasonable market rate of interest on similar loans is estimated to be 9%. Since XYZ has recently obtained similar loans from a local bank, XYZ believes that the market interest rate is considered to be a more reliable estimate. Assume that the equipment will be depreciated over 2 years with no salvage value using the straight-line method.

ABC Manufacturing primary business is equipment sales. Therefore, ABC believes that the equipment's fair value is a more reliable estimate. The cost to manufacture the equipment was $4,400 and ABC carries this equipment as inventory on its books.

Prepare all required entries for 2009 and 2010. You should create entries for both ABC and XYZ. Assume that both amortize discounts using the effective interest rate method.

Reference no: EM13768015

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