Question

Question:

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $25.3 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 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

Answer

1.

Date		Dr. $	Cr. $
Nov 1, 18	Component Inventory	25,300,000
	Notes Payable		25,300,000
	(Being Components purchased and issued note)

2.

Date		Dr. $	Cr. $
Nov 30, 18	Interest Expense	506,000
	Notes Payable (Bal.)	1,886,358
	Cash		2,392,358
	(Being 1st payment made along with interest)

Interest Expense = Outstanding Balance * Rate of Interest * 1/12 months

= 25,300,000 * 24% * 1/12 Months

Interest Expense = $506,000

N= 12 periods

Rate = 2% (24% / 12 months)

PVAF @2% for 12 Periods = 10.5753412204

Installment = Amount of Note / PVAF @2% for 12 Periods

= 25,300,000 / 10.5753412204

= $2,392,358

3.

Interest for November Month = $506,000 (Calculated above)

Interest for December month = Outstanding balance of December * 24% * 1/12 months

= (25,300,000 - 1,886,358) * 24% * 1/12 months

Interest for December month = $468,273

Interest expense in Income Statement = Interest of November + Interest of December

= 506,000 + 468,273

Interest expense in Income Statement = $974,273