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.
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: -
|1/Jan||Asset ($2,500 + $17,115)||$19,615|
|Discount on issue of note payable||$385|
|(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).
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 18