Question

On January 1, 2008, ABC company purchased a truck. The company signed a note agreeing to pay $100,000 on December 31, 2012 (i.e. single large payment). The market interest rate on January 1, 2008 for this note was 11%. The market interest rates at the end of 2008, 2009, 2010, 2011, and 2012 for this note were 9%, 10%, 9%, 11%, and 12%, respectively.

(1) Prepare the journal entry to record the purchase of the truck (round to nearest dollar).

(2) Prepare the journal entry on December 31, 2009 (assume no interest has been accrued during the year).

(3) Prepare the journal entry on December 31, 2012 (assume no interest has been accrued during the year).

(4) Will the interest expense in 2009 bo more or less than the interest expense in 2010? Explain your answer.

Answer 1

1. Purchase of Truck

Discounted Value of Truck = 100,000 / (1.11)⁵ = 100,000 x 0.59345 = 59,345

Discount on note payable = 100,000 - 59,345 = 40,655

Note Payable = 100,000

Particulars	Debit	Credit
Purchase of Truck	59,345
Discount on Note Payable	40,655
To Note Payable		100,000

2. Interest to be accrued each year = Discount on note payable / 5 years = 40655 / 5 = $8,131

Particulars	Debit	Credit
Interest Expense	8,131
To Discount on Notes Payable		8,131