Question

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2019. Straight Industries signed a note, agreeing to pay Curvy Company $480,000 for the equipment on December 31, 2021. The market rate of interest for similar notes was 9%. The present value of $480,000 discounted at 9% for five years was $311,967. On January 1, 2019, Straight Industries recorded the purchase with a debit to equipment for $311,967 and a credit to notes payable for $311,967. How much is the 2020 interest expense, assuming that the December 31, 2019 adjusting entry was made

Answer 1

$30,604

Step-by-step explanation:

The computation of the interest expense for the year 2020 is as follows:

2019 interest expense is

= Equipment amount × rate of interest

= $311,967 × 9%

= $28,077

The Dec 31 2019 liability of book value is

= $311,967 + $28,077

= $340,044

Now the interest expense for the year 2020 is

= $340,044 × 0.09

= $30,604