Straight Industries purchased a large piece of equipment from Curvy Company on J
ID: 2754417 • Letter: S
Question
Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,533. On January 1, 2014, Straight Industries recorded the purchase with a debit to equipment for $317,533 and a credit to notes payable for $317,533. On December 31, 2014, Straight recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:
Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,533. On January 1, 2014, Straight Industries recorded the purchase with a debit to equipment for $317,533 and a credit to notes payable for $317,533. On December 31, 2014, Straight recorded an adjusting entry to account for interest that had accrued on the note. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2014 is closest to:
Explanation / Answer
Interest Expense on December 2014 = $400,000 * 8% = $32,000
(As the face value of the notes payable is $400,000 , the interest will get accrued on the same at 8%)