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 $400,000 for the equipment on December 31,2021.The market rate of interest for similar notes was 8%.The present value of $400,000 discounted at 8% for three years was $317,532.On January 1,2019,Straight Industries recorded the purchase with a debit to equipment for $317,532 and a credit to notes payable for $317,532.
- On December 31,2019,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 31,2019 is closest to:

Question

Quizplus · Accepted Answer

The correct answer is A because the interest expense accrued at December 31, 2019 is $25,403. This is calculated as follows:Interest expense = Present value of note x Market rate of interest x Time= $317,532 x 8% x 1 year= $25,403

Straight Industries Purchased a Large Piece of Equipment from Curvy