Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2013. In payment for the $25 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%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

  

Required:

1.

Prepare the journal entry for LCD’s purchase of the components on November 1, 2013. (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)

2. Prepare the journal entry for the first installment payment on November 30, 2013. (Enter your answers in whole dollars. If no entry is required for a transaction, select "No journal entry required" in the first account field.)       3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2013? (Enter your answers in whole dollars.) 2013 Interest Expense

Answer 1

Ans:

1.        

Prepare the journal entry for LCD’s purchase of the components on November 1, 2013.

Ans:

Date	Accounting Entry and Explanation	Debit	Credit
Nov 1,2013	Electronic Component	$25,000,000
	Note Payable		$25,000,000

2.           

Prepare the journal entry for the first instalment payment on November 30, 2013.

Instalments Payment calculation =Amount of Loan/Present value of an Ordinary annuity of $1 for 12 periods at 1%

=$25,000,000/11.25508=$2221219.22=$2221219 (Nearest Whole Dollars)

Amortisation schedule for 2 Months
Periods	Cash Payment	Effective interest @1% outstanding	Balance Reduction	Outstanding Balance
30-11-2013	$2221219	$250000	$1971219	$23028781
31-12-2013	$2221219	$230288	$1990931	$21037850

Journal entry for the first instalment payment on November 30, 2013

Date	Accounting Entry and Explanation	Debit	Credit
Nov 30,2013	Interest Expense	$250000
	Note Payable	$1971219
	Cash		$2221219

3.           

What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2013?

Interest Expense for the period ended December 31,2013 =I.e 2 months Interest=$250,000+$230,288=$480288