Reference no: EM132463898

On 1/1/2014, XYZ signed a 2 year, $6,000 non-interest note and received equipment from 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 carried this equipment as inventory on its books prior to the sale to XYZ.

Section 1 - All required entries for 2014 and 2015. You should create entries for both ABC and XYZ. Assume that both companies amortize discounts using the effective interest rate method.

Section 2 - Now assume that both companies amortize discounts using the straight-line interest rate method. Prepare the journal entry for 2014 for ABC and XYZ to record interest.