Evans Equipment Co. sells new and used equipment. It uses a PERPETUAL inventory system, and its accounting period ends December 31. On December 28, 20x1, Evans purchased a used backhoe for resale, at an agreed price of$40,000.
Terms of purchase: 1. $10,000 down payment
2. Note payable, face amount = $30,000 maturity date =12/28/20x3
The company bookkeeper recorded the equipment in the perpetual inventory account at $40,000 and reported no interest expense for20x1 because the note did not specify that any interest would bepaid. In answer to a question by the newly engaged CPA, the bookkeeper said that the entry on the maturity date of the note would be a debit to notes payable and a credit to cash of $30,000.The transaction was not recorded until January 5, 20x2, because it was on that date that Evans received the equipment and the check for the down payment was drawn.
Give the journal entries that Evans should have made for 20x1 and20x2. Also give the entries that should be made through the maturity date, 12/28/20x3. Ignore materiality - i.e., record interest for short periods, e.g., a few days at year end. When calculating interest, use 365 days. You may not use the straight-line method. Assume a discount rate of 12%