Prepare Journal entry Truck #2 has a list price of $31,520 and is acquired for a
ID: 2578247 • Letter: P
Question
Prepare Journal entry
Truck #2 has a list price of $31,520 and is acquired for a down payment of $3,940 cash and a zero-interest-bearing note with a face amount of $27,580. The note is due April 1, 2018. Vaughn would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
Prepare Journal entry
Truck #2 has a list price of $31,520 and is acquired for a down payment of $3,940 cash and a zero-interest-bearing note with a face amount of $27,580. The note is due April 1, 2018. Vaughn would normally have to pay interest at a rate of 9% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
Explanation / Answer
As details of when the loan was taken I have to assume it was done on 1/4/2017, excatly a year ago
Also the question does not mention the year end date of the organisation, so I will assume 31/12/2017
AS SUCH
The answers are displayed below, based on assumptions which have to be made otherwise obviously with a book answer it will be wrong
LIST PRICE $ 31520
LESS D/P $3940
= OUTSTANDING: $27580
DIVIDE BY 12 MONTHS
= $2298 PER MONTH
THUS AT YEAR END:
IF CASH WAS PAID REGULARLY WITHOUT A BREAK IN COVENANT
THEN $ 2298 X 9 MTHS= $20,685 WOULD BE REDUCED FROM $27580
= $6895 WOULD BE SHOWN IN CURRENT LIABILITIES
( AS ONLY 3 MONTHS OUTSTANIDNG IS REMAINING)