Question

On December 1, Showcase Interiors purchased a shipment of furniture from Colonial House by paying $10,500 cash and issuing an installment note payable in the face amount of $28,800 . The note is to be paid in 24 monthly installments of $1,200 each. Although the note makes no mention of an interest charge, the rate of interest usually charged to Showcase Interiors in such transactions is one and a half percent per month.Instructionsa. compute the present value of the note payable, using a discount rate of one and a half percent per month.b. prepare the journal entries in the accounts of Showcase Interiros on:1. December 1, to record the purchase of the furniture (debit inventory).2. December 31, to record the first $1,200 monthly payment on the note and to recognize interest expense for one month by the effective interest method.c. show how the liability for this note would appear in the blance sheet at December 31. Assume that the note is classified as a current liability.

Answer 1

Step-by-step explanation:

a).

Present value = Cash flow x Present value of discounted factor ( 1.5% for 24 monthly installments) =$1200 x 20.030 = $24,036

b).

1. Journal entry to record the Purchase of furniture furniture $34,536

Cash $10,500

Notes payable $24,036

2. Journal entry to record the monthly payment interest expense $360 (24,036 x 1.5%)

Notes payable $840 (1200 - 360)

Cash $1200

c).

Notes payable being a liability and payable within a short period of time are classified and reported under the head current liability. They are shown at their respective closing value appearing on the date of balance sheet. Balance sheet value = $23,196 ($24,036 - $840)

Answer 2

A) using an excel spreadsheet and the NPV function, I calculated the present value of the note to be $24,036.49

=NPV(1.5%, 24 values of 1200 each) = $24,036.49

B)

December 1, merchandise purchase:

Dr Merchandise inventory 34,536.49

Cr Cash 10,500

Cr Notes payable - Colonial House 24,036.49

Cr Interest payable - Colonial House 4,763.51

December 31, first installment in note payable:

Dr Notes payable - Colonial House 768

Dr Interest payable - Colonial House 432

Cr Cash 1,200

Interest = $28,800 x 1.5% = $432

C) If the note payable is classified as a current liability:

Current liabilities:

Notes payable - Colonial House $23,268.49

Interest payable - Colonial House $4,331.51