# May 1: Purchased office equipment for $15,000, paying $3,000 down and signing a 2-year, 12%...

## Question:

May 1: Purchased office equipment for $15,000, paying $3,000 down and signing a 2-year, 12% (annual rate) note payable for the balance. The office equipment is expected to have a useful life of 10 years and a residual value of $1,500. Straight-line depreciation is appropriate. How would you record the journal entry for this?

## Notes Payable:

Notes payable is a liability account under the balance sheet. A note is a debt contract in which the issuer promise to pay the lender the borrowed capital plus the agreed interest rate on each period.

## Answer and Explanation:

Please note I used the assumption that the year end of the company is 30 April.

**Information from question**

- Purchase price of equipment :$15 000
- Note amount ($15 000-$3 000) :$12 000
- Note period :2 years
- Interest :12%

Using your financial calculator and above information,the future value of the note is calculated to be $15 052.80. The future value at end of year 1 is $13 440. Therefore, the interest of the loan on its first period is as follows:

{eq}\begin{align*} Loan~interest~on~first~period&=13,440-12,000\\ &=1,440 \end{align*} {/eq}

The equation below shows the calculation of the depreciation expense using the straight line method.

{eq}\begin{align*} Depreciation&=\frac{Cost~price-Salvage~value}{Useful~life}\\ &=\frac{15,000-1,500}{10}\\ &=\frac{13,500}{10}\\ &=1,350 \end{align*} {/eq}

**Journals**

Date | DR | CR | |
---|---|---|---|

1 May | Equipment | $15 000 | |

Cash | $3 000 | ||

Note payable | $12 000 | ||

Recognize asset and corresponding payment and note payable | |||

30 April | Interest on note | $1 440 | |

Note payable | $1 440 | ||

Recognize interest on note payable | |||

30 April | Depreciation | $1 350 | |

Accumulated depreciation | $1 350 | ||

Recognize depreciation on equipment |

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from Financial Accounting: Help and Review

Chapter 8 / Lesson 7