Question

Bob the Builder purchases an equipment, which will last 17 years with no residual value on August 1, Year 7. The company issues an $800,000, four-year, non-interest-bearing note for the equipment when the prevailing market interest rate for notes of this nature is 8%. The company will pay off the note in four $200,000 installments on each July 31, starting July 31, Year 8. The company adopts mid-month convention for depreciation and depreciation expense is recognized once at the end of the fiscal year, which is December 31, using straight-line method. Please assume that there is no other asset or liability.

(1) Calculate depreciation expense to be recognized for Year 7.

(2) Calculate interest expense to be recognized for Year 8.

Answer 1