Question

Presented below are two independent situations: (a) On January 1, 2017, Bridgeport Inc. purchased land that had an assessed value of $383,000 at the time of purchase. A $508,000, zero-interest-bearing note due January 1, 2020, 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, 2017, and the interest expense to be reported in 2017 related to this transaction. (Round answers to 0 decimal places, e.g. 38,548.) Land to be recorded at January 1, 2017 $ Interest expense to be reported $ (b) On January 1, 2017, Indigo Furniture Co. borrowed $4,700,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Indigo Furniture agreed to sell furniture to this customer at lower than market price. A 8% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction.

Answer 1

Solution:

a.)

Amount of Note payable	$508,000
PV factor for 3years at 12%	0.71178
present Value of Note	$361,584
Hence Land will be recorded at	$361,584
Interest expenses for year 2017( 361584*12%)	$43,390.08

b.) Journal Entries:

Date	Particulars	Debit($)	Credit($)
	Cash	$4,700,000
	Discount on Notes Payable	$1,245,500
	Notes Payable		$4,700,000
	Unearned Sales Revenue		$1,245,500
	(Being Notes Issued)

Working Notes:

Unearned Sales Revenue = $4,700,000-4,700,000*PVIF(8%,4)
$4,700,000-(4,700,000*0.7350)
=$1,245,500

Carrying values of the note = $4,700,000-$1,245,500 = $3,454,500
Interest Rate = 8%
Interest expenses = 3454500*8% = $276360