Question

Straight Industries purchased a large piece of equipment on January 1, 2016. Straight Industries signed a note, agreeing to pay $400,000 for the equipment on December 31, 2018. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years was $317,520. On January 1, 2016, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. Assuming no adjusting entries have been made during the year, the interest expense accrued at December 31, 2016 is closest to:

Answer 1

$25,402

Step-by-step explanation:

Calculation for the amount of interest accrued at December 31, 2016

Using this formula

Interest expense accrued= 2016 Beginning Note payable liability*Interest rate

Let plug in the formula

Interest expense accrued =$317,520*8%

Interest expense accrued =$25,402

Therefore the interest expense accrued at December 31, 2016 is closest to $25,402