Question

Shaw Industries purchased a large piece of equipment from Charles Company on January 1, 2014. Shaw industries signed a note, agreeing to pay Charles Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,520. On January 1, 2014, Shaw Industries recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On December 31, 2014, Shaw recorded an adjusting entry to account of interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:

Answer 1

Answer:

Interest expense for the year: 25,401.6

Explanation:

Carrying value of the note x 8% = interest on note payable

317,520 x 8% = 25,401.6

The interest expense will be for this amount

And the journal entry will be as follow

Interest Expense 25,401.6

   Note Payable                      25,401.6

As the note is discounted, we will recognize interest until maturity against the note, so it reach their face value at maturity.

Because this interest won't be exigible until maturity, they are accrued interest but do not invovle a cash disbursmement for the period.