LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2021. In payment for the $24 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 12%.
Required:
1. Prepare the journal entry for LCD’s purchase of the components on November 1, 2021.
2. Prepare the journal entry for the first installment payment on November 30, 2021.
3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2021?

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Parrain Parrain · Answer 1 · 2022-03-21T12:12:08+01:00

Based on the details given by LCD Industries such as the amount of the note and the interest rate, the journal entries are:

Date Account title Debit Credit

Nov. 1 2021 Inventory $24,000,000

Note payable $24,000,000

Nov. 30, 2021 Interest expense $240,000

Note payable $1,892,366.66

Cash $2,132,366.66

Amount of interest to be reported in income statement = $481,076.33.

Inventory will be debited with the payment amount of $24 million. This amount will also be credited to the Note payable account.

The interest expense will be:

= 24,000,000 x 12% x 1/12 months

= $240,000

Cash payment:

= Amount / Present value interest factor of annuity, 1 year, 12%

= 24,000,000 / 11.2551

= $2,132,366.66

= Interest expense in November + (Note amount - note payable for November ) x 1%

= 260,000 + (24,000,000 - 1,892,366.66) x 1%

= $481,076.33

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