Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $25.7 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. & 2. Prepare the journal entry for LCD’s purchase of the components on November 1, 2018 and the first installment payment on November 30, 2018.
3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2018?

2. Record the first installment payment

Notes Payable ?

Interest Expense ?

Cash 2283413

Answer 1

Solution 1 and 2:

Monthly interest rate = 12% / 12 = 1%
periods = 12 months
Monthly payment on note = $25,700,000 / Cumulative PV factor at 1% for 12 periods

= $25,700,000 / 11.25508 = $2,283,413

Journal Entries - LCD Industries
Date	Particulars	Debit	Credit
01-Nov-18	Inventory	$2,57,00,000
	Notes Payable		$2,57,00,000
	(To record purchase of the components inventory)

Journal Entries - LCD Industries
Date	Particulars	Debit	Credit
30-Nov-18	Interest expense ($25700000*1%)	$2,57,000
	Notes payable	$20,26,413
	Cash		$22,83,413
	(To record installment payment)

Solution 3:

Interest expense for Nov 2018 = $257,000

Interest expense for Dec 2018 = ($25700000 - $2026413) *1% = $236,736

Interest expense reported in income statement for the year ended December 31, 2018 = $257000 + $236736 = $493,736