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Question - On January 1, 2019, Nonsuch Corporation sold specialized equipment originally costing $9,500 (Nonsuch had paid 9,500 to buy it as inventory). The market value of the equipment was not readily determinable. Nonsuch sold the equipment to Neverland, Inc. who is going to use it in their operations for 5 years at which time it will have no salvage value.
Nonsuch received a $4,000 downpayment from Neverland and will receive five payments of 4,000 made annually (without a stated interest rate) beginning December 31, 2019 (Neverland will pay Nonsuch 5 equal annual installments). The current market rate on notes of a similar nature and risk is 6 percent and will be used for both the buyer and the seller. You will need to use present value to calculate the value of the equipment and the note.
Required -
1. Prepare the entries to record the sale/purchase of the equipment on January 1, 2019 for both Nonsuch and Neverland.
2. Prepare the entries for both Nonsuch and Neverland at the end of 2019 and 2020 if all adjusting entries are made only at the end of the year and straight-line depreciation is used.
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