Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2021. In payment for the $24.8 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 entries for LCD’s purchase of the components on November 1, 2021 and the first installment payment on November 30, 2021.
3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021?

Answer 1

Journal entries are as follows:

Date	Account and Explaination	Debit($)	Credit($)
Nov.1, 2021	Equipment	24,800,000
	Notes Payable		24,800,000
	(Recorded the purchase of the components )
Nov 30, 2021	Interest Expenses ( $24,800,000 * 1%)	248,000
	Notes Payable	1,955,446
	Cash ($24,800,000 / PVIFA(1% ,12)		2,203,446
	($24,800,000 / 11.2551)
	(Recorded the interest expenses)

3) The amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021 is calculated is as follows:

The amount of interest expense = ($24,800,000 * 1% + (($24,800,000 - $1,955,446) * 1%)

                                               = $248,000 + $228,446              

                                                = $476,446

The amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021 is $476,446.