Accounting


Accounting Forum

AccountingCoach.com is the world's largest free online accounting course.


Not signed in (Sign In)

Categories

Vanilla 1.1.7 is a product of Lussumo. More Information: Documentation, Community Support.

Welcome Guest!
Want to take part in these discussions? If you have an account, sign in now.
If you don't have an account, apply for one now.

General Accounting Discussions: how to record interest expense incurred on asset purchased

Bottom of Page

1 to 6 of 6

  1.  
  1.  
    I purchased equipment that is being financed over five years. The total amount of interest will be $5000 while the cost of the equipment is $9000. Should I expense the entire $5000 as interest expense? Or should this expense be spread out over the 5 year period in which we are paying off the loan. If I do allocate the interest expense over 5 years, what account will I use to journalize the purchase?

    equipment (dr) $9000
    interest expense (dr) $5000 (if allocated over 5 years, how should I account for this interest expense?)
    note payable (cr) 14000


    I appreciate the help!
    Susan
    • CommentAuthorcgamon
    • CommentTimeAug 3rd 2007
     
    all cost related to acquisition should form part of the cost of the equipment for simplification purposes if your business is not that complicated.
    cost of the equipment- 9000
    interest -5000

    tota cost of equipment= 14,000 entry; equipment 14,000
    /5 accounts payable-equipment 14,000
    ----------
    annual depreciation 2800

    the entry will be;
    depreciation expense -equipment 2800
    accumulated depreciation-equip't. 2800
  3.  
    It is my understanding that you should not capitalize interest on a piece of equipment unless it satisfies certain conditions set forth under GAAP. This equipment was not custom built and the lower of cost or market would be the cost of the equipment, not including the amount of interest to finance it, so it really doesn't sound right to capitalize the interest. If it takes longer to pay off the loan, you wouldn't add that interest expense to the cost of the asset on the books. Also, the life of the loan is 5 years, not the life of the equipment, so I don't think your depreciation figure is correct.
    • CommentAuthorCounter
    • CommentTimeAug 6th 2007
     
    You would record the equipment at its cost. Future interest is not part of the equipment's cost and future interest is not recorded until the years in which the loan is outstanding. Interest is an expense for borrowing money and should be matched to the periods when the money is owed.

    IF the asset was financed completely with a $9,000 note that will have $5,000 of future interest, the entry will be a debit to Equipment for $9,000 and a $9,000 credit to Notes Payable. The cost of the equipment should be depreciated over the useful life of the equipment.

    The future interest should be expensed in the future accounting periods. If the loan is a 5-year loan, then the interest is spread over those five years. If the principal of $9,000 is being reduced each year with a principal payment, the interest expense will be more in the first year than it will be in the later years. Interest should correlate to the principal balance.
    • CommentAuthorfarrukh
    • CommentTimeAug 15th 2007
     
    counter is right
    • CommentAuthoraakbar
    • CommentTimeSep 10th 2007
     
    i think both beachflower and Counter are right

1 to 6 of 6

  1.  



 

Why AccountingCoach.com?

the accounting coach

AccountingCoach.com is designed to help people without an accounting background easily understand accounting concepts at no cost.


By investing thousands of hours, we have created clear and concise accounting information for both business people and students of all ages.


We understand how difficult accounting can be. That's why we have ensured that each accounting topic includes a clear explanation, reinforcing drills, Q&A, puzzles, dictionary of terms, etc.


Read 1,440 Visitor Testimonials



What's on AccountingCoach.com?