On January 1, 2011, Lorry Manufacturing Company purchased equipment from Wales Inc.There was no established market price for the equipment which has an 8 year life and no salvage value.Lorry gave Wales a £105,000 zero-interest-bearing note payable in 3 equal annual installments of £35,000, with the first payment due December 31, 2011.The prevailing rate of interest for a note of this type is 8%.The present value of the note at 8% was £90,199.Assuming that Lorry uses the straight-line method of depreciation, what amounts will be reported in the company's 2011 income statement for interest expense and depreciation expense for the note and equipment?

Question

Quizplus · Accepted Answer

The interest expense is calculated as the present value of the note (£90,199) multiplied by the interest rate (8%), which equals £7,216. The depreciation expense is calculated by dividing the present value of the equipment (£90,199) by its useful life (8 years), resulting in £11,275.

On January 1, 2011, Lorry Manufacturing Company Purchased Equipment from Wales