Question

On January 1, 2021, Byner Company purchased a used tractor. Byner paid $6,000 down and signed a noninterest-bearing note requiring $38,000 to be paid on December 31, 2023. The fair value of the tractor is not determinable. An interest rate of 10% 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?

Answer 1

1. Journal entry will be:-

Tractor A/c............Dr. $ 34549.96

To Cash A/c $ 6000.00

To Notes payable A/c $ 28549.96 (38000*0.751314800901578)

(Being tractor purchased)

2. Interest expense for 2021=(28549.96*10%)=$ 2855

Interest expense for 2022= (28549.96+2855)*10%=$ 3140.50

3. Amount of liability at the end of 2021= (28549.96+2855)=$ 31404.96

Amount of liability at the end of 2022= (31404.96+3140.50)= $34545.45

Note:- PV factor @ 10% for year 3=0.751314800901578