Question

Crimson Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $27 million purchase, Crimson issued a 16-month installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 24%

Present value of 1 for 16 periods at 1% 0.85282

Present value of 1 for 16 periods at 1.5% 0.78803  

Present value of 1 for 16 periods at 2% 0.72845

Present value of annuity for 16 periods at 1% 14,71787       

Present value of annuity for 16 periods at 1.5% 14.13126   

Present value of annuity for 16 periods at 2% 13.57771

Required: (Round to the nearest dollar)

1. Prepare the journal entry for Crimson’s purchase of the components on November 1, 2018.
2. Calculate the amount of the monthly payment.
3. Prepare the journal entry for the first installment payment on November 30, 2018.
4. Calculate the amount of interest expense that Crimson will report in its income statement for the year ended December 31, 2018?

Answer 1

Date	Account Titles	Debit	Credit
1-Nov	Components / Equipment	$ 27,000,000
	Notes Payable		$ 27,000,000

Amount of monthly payment = $27000000 / 13.57771 = $1988553

Date	Account Titles	Debit	Credit
30-Nov	Notes Payable	$    1,448,553
	Interest Expense	$       540,000
	Cash		$    1,988,553

Period End	Cash Paid	Interest Expense	Discount Amortized	Carrying Value
Nov 1, 2018				$ 27,000,000
Nov, 2018	$   1,988,553	$      540,000	$   1,448,553	$ 25,551,447
Dec, 2018	$   1,988,553	$      511,029	$   1,477,524	$ 24,073,923

Interest Expense for year ended Dec 31, 2018 = $540000+511029 = $1,051,029