LCD Industries purchased a supply of electronic components from Entel Corporatio

Question

LCD Industries purchased a supply of electronic components from Entel Corporation on November 1, 2018. In payment for the $25.2 million purchase, LCD issued a 1-year installment note to be paid in equal monthly payments at the end of each month. The payments include interest at the rate of 18%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. & 2. Prepare the journal entry for LCD’s purchase of the components on November 1, 2018 and the first installment payment on November 30, 2018.
3. What is the amount of interest expense that LCD will report in its income statement for the year ended December 31, 2018?

Explanation / Answer

Equal monthly payments = (P x r) / [1 - (1 / (1 + r)^n] = (25 x 0.015) / [1 - (1 / (1.015)^12] = $ 2.310336 M

where, P = Principal amount, r = interest rate each period=.18/12=0.015 and n = number of installments=12

JV entry on Nov 1:

Debit : Purchase A/c $25.2 M

Credit : Entel Corporation $25.2 M

JV entry on 30 Nov 2018:

Debit : Entel Corporation $1.932 M

Debit: Interest Exp $0.378 M

Credit: Bank A/c $2.310 M

3. Interest expenditure on 31 Dec 2018 = Int for Nov and Dec = $ 0.378 M + $ 0.349 M = $ 0.727 M

Month Opening outstanding Interest for the month Total outstanding Principal repayment Total Repayment (Principal + Int) Closing outstanding Nov-18             25.200               0.378             25.578                      1.932                       2.310             23.268 Dec-18             23.268               0.349             23.617                      1.961                       2.310             21.306 Jan-19             21.306               0.320             21.626                      1.991                       2.310             19.316 Feb-19             19.316               0.290             19.605                      2.021                       2.310             17.295 Mar-19             17.295               0.259             17.554                      2.051                       2.310             15.244 Apr-19             15.244               0.229             15.473                      2.082                       2.310             13.162 May-19             13.162               0.197             13.360                      2.113                       2.310             11.050 Jun-19             11.050               0.166             11.215                      2.145                       2.310               8.905 Jul-19               8.905               0.134               9.038                      2.177                       2.310               6.728 Aug-19               6.728               0.101               6.829                      2.209                       2.310               4.519 Sep-19               4.519               0.068               4.587                      2.243                       2.310               2.276 Oct-19               2.276               0.034               2.310                      2.276                       2.310              (0.000)

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