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) Journal entry to record purchase of truck

Truck A/c Dr 100000

To Creditor/c (Name) 100000

(Being asset purchased on credit)

2) Journal entry on December 31, 2009

Interest expense A/c Dr 9000

Forward contract loss A/c Dr 2000

To Cash A/c 11000

(Being interest accounted in the books)

3) Journal entry on December 31, 2012

Interest expense A/c Dr 12000

To cash A/c 11000

To forward exchange gain A/c 1000

(Being interest accounted in books)

Creditor a/c Dr 100000

To    Cash/ Bank a/c 100000

( being amount paid to creditor)

4) Interest expense will be more in 2009 than 2010 but total expenditure to be paid nay not change because of rate on promissory note is 11%