Question

Presented below are two independent situations:

(a) On January 1, 2020, Bridgeport Inc. purchased land that had an assessed value of $316,000 at the time of purchase. A $518,000, 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, Indigo Furniture borrowed $6,100,000 (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, Indigo 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.)

Answer 1

Answer:

a.)

Amount of Note payable	$ 518,000
PV factor for 3years at	12%   0.71178
Present Value of Note	$368,702
Land will be recorded at	$368,702
Interest expenses for year 2020( 368,702*12%)	$44,244.24

b.) Journal Entries:

Date	Particulars	Debit($)	Credit($)
	Cash A/c Dr.	6,100,000
	Discount on Notes Payable A/c Dr.	1,933,700
	To Notes Payable A/c		6,100,000
	To Unearned Sales Revenue A/c		1,933,700
	(Being Notes Issued)

Working Notes:

Unearned Sales Revenue = $6,100,000-6,100,000*PVIF(10%,4)
$6,100,000-(6,100,000*0.6830)
=$1,933,700

Carrying values of the note = $6,100,000-$1,933,700 = $ 4,166,300
Interest Rate = 10%
Interest expenses = $ 4,166,300*10% = $416,630