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On December 1, Showcase Interiors purchased a shipment of furniture from Colonial House by paying $10,500 cash and issuing an installment note payable in the face amount of $28,800. The note is to be paid in 24 monthly installments of $1,200 each. Although the note makes no mention of an interest charge, the rate of interest usually charged to Showcase Interiors in such transactions is 1½ percent per month.

a. Compute the present value of the note payable, using a discount rate of 1½ percent per month.

b. Prepare the journal entries in the accounts of Showcase Interiors on:

1. December 1, to record the purchase of the furniture (debit Inventory).
2. December 31, to record the first $1,200 monthly payment on the note and to recognize interest expense for one month by the effective interest method.

c. Show how the liability for this note would appear in the balance sheet at December 31. (Assume that the note is classified as a current liability.)

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M944453

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