Question
In: Accounting
Crimson Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In...
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)
- Prepare the journal entry for Crimson’s purchase of the components on November 1, 2018.
- Calculate the amount of the monthly payment.
- Prepare the journal entry for the first installment payment on November 30, 2018.
- Calculate the amount of interest expense that Crimson will report in its income statement for the year ended December 31, 2018?
Solutions
Expert Solution
| 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
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