Question

Red, Inc. bought land in 2015 for $8,650,000. In 2025, Yellow bought the land from Red on March 1, signing a zero-interest bearing note for $12,680,000. The note will be paid in 4 equal payments starting on March 1, 2025. The note has no ready market and the prevailing rate of interest for this type of note is 8%. The face value of the note is $10,220,000.

Using the effective interest method, what amounts would be recorded on March 1, 2025?

	Indicate Debit or Credit	Amount
Notes Payable
Interest Expense
Discount on Note Payable
Land

Using the effective interest method, what amounts would be recorded on December 31, 2025?

	Indicate Debit or Credit	Amount
Notes Payable
Interest Expense
Interest Payable
Discount on Note Payble
Cash

Answer 1

Mar 1, 2025

Notes Payable	Credit	$    12,680,000
Interest Expense	Debit	$                     -
Discount on Note Payable	Debit	$       2,460,000
Land	Debit	$    10,220,000

Dec 31, 2015

Notes Payable	Credit	$    12,680,000
Interest Expense	Debit	$          681,333	=10220000*8%*10/12
Interest Payable	Credit	$                     -
Discount on Note Payable	Debit	$       1,778,667	=2460000-681333
Land	Debit	$    10,220,000