Question

n January 1, 2021, Byner Company purchased a used tractor. Byner paid $6,000 down and signed a noninterest-bearing note requiring $43,000 to be paid on December 31, 2023. The fair value of the tractor is not determinable. An interest rate of 12% properly reflects the time value of money for this type of loan agreement. The company’s fiscal year-end is December 31. (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. Prepare the journal entry to record the acquisition of the tractor.
2. How much interest expense will the company include in its 2021 and 2022 income statements for this note?
3. What is the amount of the liability the company will report in its 2021 and 2022 balance sheets for this note?
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Answer 1

1) Fair value of tractor
Down payment	6000
present value of note (43000*0.71178)	30607
Fair value	36607
Journal entries
Particulars	Debit	Credit
01-Jan	Tractor	36607
	discount on notes payable(43000-30607)	12393
	cash		6000
	notes payable		43000
2) Interest expenses for 2021 = (30607*12%) = 3673
interest expenses for 2022 = (30607+3763)*12% = 4113.58
3) Liability reported 2021 = (30607+3673) = 34280
liability reported 2022 = (34280+4113.58) = 38393.58

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