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Truck #2 has a list price of $20,000 and is acquired for a down payment of $2,500 cash and a...

Question:

Truck #2 has a list price of $20,000 and is acquired for a down payment of $2,500 cash and a zero-interest-bearing note with a face amount of $17,500. The note is due April 1, 2018. Larkspur would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%. Prepare the appropriate journal entries for the above transactions for Larkspur Corporation.

Interest:

The interest is treated as the expense for the period and it is debited in the income statement. Interest expense is a temporary account but, the interest payable is a permanent account.

Answer and Explanation:

Record journal entry as follows: -

Journal Entry
Date Particulars Debit Credit
1/Jan Asset ($2,500 + $17,115) $19,615
Discount on issue of note payable $385
Cash $2,500
Note Payable $17,500
(Being acquistion of asset recorded)

Note 1: The interest rate for 3 months is 2.25% or 0.0225 (9% x 3/12).

Note 2: The value of the note payable considered as part of the asset acquisition cost is $17,115 ($17,500/1.0225).

Note 3: Discount on note payable is $385 ($17,500 - $17,115).


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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