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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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