Evans Equipment Co. Sells new and usedearth-moving equipment. It uses a perpetual inventory system, andits accounting period ends December 31. On December 28, 20x1, Evanspurchased 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 perpetualinventory 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, thebookkeeper said that the entry on the maturity date of the notewould be a debit to notes payable and a credit to cash of $30,000.The transaction was not recorded until January 5, 20x2, because itwas on that date that Evans received the equipment and the checkfor 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 thematurity date, 12/28/20x3. Ignore materiality - i.e., recordinterest for short periods, e.g., a few days at year end. Whencalculating interest, use 365 days. You may not use thestraight-line method. Assume a discount rate of 12%