Question

On January 1, 2021, Byner Company purchased a used tractor. Byner paid $7,000 down and signed a noninterest-bearing note requiring $40,000 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

Fair Value of Tractor =$7,000 + $40,000*PVIF(10%,3 Years)
Fair Value of Tractor =$7,000 + $40,000*0.75131
Fair Value of Tractor =$7,000 + $30,052 =$37,052
Part 1
Date	Accounts and explanation	Debit(in $)	Credit(in $)
Jan 1,2021	Equipment-Tractor	37052
	Discount on Notes Payable	9948
	Cash		7000
	Notes Payable		40000
	(to record purchase of tractor)
Part 2
Interest expense for 2021 =$30,052*10% =$3,005
Interest expense for 2022 =($30,052+$3,005)*10% =$3,306
Part 3
Notes Payable reported in Balance sheet for 2021 =$30,052+$3,005 =$33,057
Notes Payable reported in Balance sheet for 2022 =$33,057+$3,306 =$36,363