Question

Unit 7 – Liabilities

Fixer Upper Housing Limited purchased equipment costing $150,000 on October 1, 2019, by paying 10% down and signing an 8%, 9-month note payable for the balance. Fixer Upper Housing Limited's year end is December 31.

1. Prepare journal entries to record the purchase of the equipment, the accrual of interest on December 31, and the payment of the note at maturity. For ease of computation assume that Fixer Upper calculates interest expense based on the number of months, outstanding, rather than the number of days.

2. Determine the balance of any current liabilities associated with the note as of December 31, 2019.

		Debit	Credit
Oct 1, 2019
Dec 31, 2019
June 30, 2020
	.

Answer 1

Cost of equipment = $150,000

Cash down payment = 10%

= 150,000 x 10%

= $15,000

Note payable issued = 150,000 - 15,000

= $135,000

Journal

Date	Account Title and Explanation	Debit	Credit
Oct 1, 2019	Equipment	150,000
	Cash		15,000
	Note payable		135,000
Dec 31, 2019	Interest expense	2,700
	Interest payable		2,700
June 30, 2020	Note payable	135,000
	Interest payable	2,700
	Interest expense	5,400
	Cash		143,100

Interest payable on December 31, 2019 = Note payable x Interest rate x 3/12

= 135,000 x 8% x 3/12

= $2,700

Interest expense on June 30, 2020 = Note payable x Interest rate x 6/12

= 135,000 x 8% x 6/12

= $5,400

Current liabilities on December 31, 2019 = Note payable + Interest payable

= 135,000 + 2,700

= $137,700