Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much is the 2015 interest expense, assuming that the December 31, 2014 adjusting entry was made?
A) $27,434.
B) $27,962.
C)$32,000.
D)$29,693.

Question

Quizplus · Accepted Answer

The correct answer is A. The interest expense for 2015 is $27,434. This is calculated as follows:Interest expense = Present value of note x Market rate of interest= $317,520 x 8%= $27,434

Straight Industries Purchased a Large Piece of Equipment from Curvy