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

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 Equipment15 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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