On May 1, 2020, Sea Escape Ltd

question 56

Essay

On May 1, 2020, Sea Escape Ltd. purchases a new automobile for $18,000 from the dealer who provides the financing. The three-year, interest-free loan is repayable at $500 per month. The market rate of interest for similar transactions is 0.25% per month.
Required:
Prepare journal entries to record:
a. the purchase of the automobile.
b. the accrual of interest and the loan payment at the end of May 2020.

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Definitions:

Net Income

Net income is the total earnings of a company after subtracting all expenses, including taxes, costs, and losses, from its total revenue, indicating its profit.

LIFO Method

An inventory valuation method that assumes the last items placed in inventory are the first sold, affecting cost of goods sold and inventory valuations on financial statements.

Costs Decreasing

A situation where the expenses associated with the production or operation of a business are reducing over time.

Lowest Net Income

Refers to the lowest amount of net income recorded by a company over a given period, demonstrating its worst financial performance phase.