Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2021. In payment for the $24.4 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 24%.(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

Amount of notes:			24,40,000
Divide: Annuity PVF at 2% for 12 periods	10.57534
Monthly Instalment			230725.4
Amort Chart:
Date	Payment	Interest	Principal	Carrying value
		expense	repayment	of notes
01.11.21				24,40,000
30.11.21	230725.4	48800	181925.4	22,58,075
31.12.21	230725.4	45161	185564.4	20,72,510
Interest expense = Carrying value of previous period *2%
Principal repayment = Payment - Interest expense
Carrying value = Carrying value of previous period - Principal repaymetn
Journal entries:
S.no.	Accounts title and explanations		Debit $	Credit $
01.11.21	Merchandise inventory		24,40,000
	Notes payable				24,40,000
	(for purchase of inventory)
30.11.21	Notes payable			181925
	Interest expense			48800
	Cash account				2,30,725
	(for payment f instalment)
Amount of Interest expense for Year-2021:
Interest expense on 30.11.21		48800
Interest expense on 31.12.21		45,161
Amount of Interest expense for Year-2021:	93,961