Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $25.2 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 18%. (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?

Answer 1

Equal monthly payments = (P x r) / [1 - (1 / (1 + r)^n] = (25 x 0.015) / [1 - (1 / (1.015)^12] = $ 2.310336 M

where, P = Principal amount, r = interest rate each period=.18/12=0.015 and n = number of installments=12

JV entry on Nov 1:

Debit : Purchase A/c $25.2 M

Credit : Entel Corporation $25.2 M

JV entry on 30 Nov 2018:

Debit : Entel Corporation $1.932 M

Debit: Interest Exp $0.378 M

Credit: Bank A/c $2.310 M

3. Interest expenditure on 31 Dec 2018 = Int for Nov and Dec = $ 0.378 M + $ 0.349 M = $ 0.727 M

Month	Opening outstanding	Interest for the month	Total outstanding	Principal repayment	Total Repayment (Principal + Int)	Closing outstanding
Nov-18	25.200	0.378	25.578	1.932	2.310	23.268
Dec-18	23.268	0.349	23.617	1.961	2.310	21.306
Jan-19	21.306	0.320	21.626	1.991	2.310	19.316
Feb-19	19.316	0.290	19.605	2.021	2.310	17.295
Mar-19	17.295	0.259	17.554	2.051	2.310	15.244
Apr-19	15.244	0.229	15.473	2.082	2.310	13.162
May-19	13.162	0.197	13.360	2.113	2.310	11.050
Jun-19	11.050	0.166	11.215	2.145	2.310	8.905
Jul-19	8.905	0.134	9.038	2.177	2.310	6.728
Aug-19	6.728	0.101	6.829	2.209	2.310	4.519
Sep-19	4.519	0.068	4.587	2.243	2.310	2.276
Oct-19	2.276	0.034	2.310	2.276	2.310	(0.000)