Question

Presented below are two independent situations:

(a) On January 1, 2020, Sweet Inc. purchased land that had an assessed value of $367,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2023, was given in exchange. There was no established exchange price for the land, nor a ready fair value for the note. The interest rate charged on a note of this type is 12%.

Determine at what amount the land should be recorded at January 1, 2020, and the interest expense to be reported in 2020 related to this transaction. (Round answers to 0 decimal places, e.g. 38,548.)

Land to be recorded at January 1, 2020		$
Interest expense to be reported		$

(b) On January 1, 2020, Pharoah Furniture borrowed $3,900,000 (face value) from Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Pharoah Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan.

Prepare the journal entry to record this transaction. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit

Determine the amount of interest expense to report for 2020. (Round answer to 0 decimal places, e.g. 38,548.)

Interest expense to be reported for 2020

$

PLEASE PROVIDE STEPS AND EXPLANATION WITH ANSWERS. THANK YOU!

Answer 1

a)

Amount of Note payable	$550,000
PV factor for 3years at 12%	0.71178
present Value of Note	$391,479
Hence Land will be recorded at	$391,479
Interest expenses for year 2020 (391,479 * 12%)	$46,977

b)

Date	Particulars	Debit	Credit
	Cash	$3,900,000
	Discount on Notes Payable	$1,236,248
	Notes Payable		$3,900,000
	Unearned Sales Revenue		$1,236,248
	(Being to record notes Issued)

Workings:

Unearned Sales Revenue = $3,900,000-3,900,000*PVIF(10%,4)
$3,900,000-(3,900,000*0.68301)
=$1,236,248

Carrying values of the note = $3,900,000-$1,236,248 = $2,663,752
Interest Rate = 10%
Interest expenses = $2,663,752*8% = $266,375

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