Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2021. In payment for the $25.6 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 18%.

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?

Answer 1

In this case we will have to calculate the monthly installment payment
Monthly installment payment	Present value/((1-(1+r)^-n))/r
where r is interest rate and n is number of payments
Monthly interest rate (r)	1.50%	18%/12
No of payments (n)	12	12*1
Monthly installment payment	25600000/10.90751
Monthly installment payment	$2,347,007.82
Journal entry to record purchase of components
Date	General Journal	Debit	Credit
1-Nov-21	Inventory	$25,600,000
	Notes payable		$25,600,000
	(To record purchase of component)
2
Journal entry to record first installment payment
Date	General Journal	Debit	Credit
30-Nov-21	Interest expense ($25.6 million*1.5%)	$384,000
	Notes payable (2347008-384000)	$1,963,008
	Cash		$2,347,008
	(To record first installment payment)
3
Calculation of interest expense for December 31, 2021 is shown below
Interest expense Nov	25600000*1.5%	$384,000
Interest expense Dec	(25600000-1963008)*1.5%	$354,555
Interest expense		$738,555
Thus, interest expense of $738,555 would be reported in income statement for year ended 31st December 2021