Question

Fixer Upper Housing Limited purchased equipment costing $200,000 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.

Answer 1

Journal

Date	Account Title and Explanation	Debit	Credit
Oct 1, 2019	Equipment	200,000
	Cash		20,000
	Note payable		180,000
Dec 31, 2019	Interest expense	3,600
	Interest payable		3,600
June 30, 2020	Note payable	180,000
	Interest payable	3,600
	Interest expense	7,200
	Cash		190,800

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

= 180,000 x 8% x 3/12

= $3,600

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

= 180,000 x 8% x 6/12

= $7,200

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

= 180,000 + 3,600

= $183,600