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.
- How much is the 2020 interest expense,assuming that the December 31,2019 adjusting entry was made?
A)$27,435.
B)$27,962.
C)$32,000.
D)$29,693.

Question

Quizplus · Accepted Answer

The correct answer is A. The interest expense for 2020 is $27,435. This is calculated as follows:Interest expense = Present value of note x Market rate of interest= $317,532 x 8%= $25,402.56However, since the adjusting entry was made on December 31, 2019, the interest expense for 2020 is only for the period from January 1, 2020 to December 31, 2020. This is a period of 12 months.Therefore, the interest expense for 2020 is:= $25,402.56 x 12/12= $27,435

Straight Industries Purchased a Large Piece of Equipment from Curvy