Question

ABC Moving and Storage acquired a new truck for $100,000, paying $20,000 cash and signing a promissory note for the balance. According to the bill of sale, ABC also paid cash for sales tax of 8%, plus registration, tags and delivery fees of $400. The new truck is estimated to have a 5-year economic life and a residual (salvage) value of $8,400. ABC uses straight-line depreciation. Due to delays, the truck was not placed in service until April 1, 2020. ABC has a December 31 fiscal year.

Question

Refer to problem 1. The promissory note that ABC signed to pay for the balance of the truck is dated April 1, 2020. The interest rate is 6% and payment terms are $40,000 plus interest due on March 31, 2021 and the balance due, plus interest, on March 31, 2022. Prepare journal entries required on December 31, 2020, March 31, 2021, December 31, 2021 and March 31, 2022. Show calculations.

Answer 1

	Account	Debit	Credit
Dec 31. 2020	Depreciation expense	$      15,000
	Accumulated depreciation		$      15,000
	[Depreciation = $100,000/5 × 9/12]
Dec 31. 2020	Interest expense	$        3,600
	Interest payable		$        3,600
	[Interest = $80,000 × 6% × 9/12]
March 31. 2021	Interest payable	$        3,600
	Interest expense	$        1,200
	Note payable	$      40,000
	Cash		$      44,800
	[Interest = $80,000 × 6% × 3/12]
Dec 31. 2021	Depreciation expense	$      20,000
	Accumulated depreciation		$      20,000
	[Depreciation = $100,000/5]
Dec 31. 2021	Interest expense	$        1,800
	Interest payable		$        1,800
	[Interest = $40,000 × 6% × 9/12]
March 31. 2022	Interest payable	$        1,800
	Interest expense	$           600
	Note payable	$      40,000
	Cash		$      42,400
	[Interest = $40,000 × 6% × 3/12]

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