Straight Industries purchased a large piece of equipment from Curvy Company on January 1,2010.Straight Industries signed a note,agreeing to pay Curvy Company $400,000 for the equipment on December 31,2012.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 1,2010,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 2011 interest expense,assuming that the December 31,2010 adjusting entry was made?
A)$27,434
B)$27,962
C)$32,000
D)$29,693

Question

Quizplus · Accepted Answer

2010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) F1F1F1S1F1F1F10 Interest rate (8%).December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010 accrued interest expense ($25,402).2011 interest expense ($27,434) = Note payable liability at the beginning of 2011 ($342,922) F1F1F1S1F1F1F10 Interest rate (8%).

Straight Industries Purchased a Large Piece of Equipment from Curvy