Question

Exercise 14-17 Presented below are two independent situations: (a) On January 1, 2020, Riverbed Inc. purchased land that had an assessed value of $329,000 at the time of purchase. A $501,000, 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, Marin Furniture borrowed $4,700,000 (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, Marin 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. (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.) Account Titles and Explanation Debit Credit Determine the amount of interest expense to report for 2020. (Round answer to 0 decimal places, e.g. 38,548.) Interest expense to be reported for 2020 $ SHOW LIST OF ACCOUNTS LINK TO TEXT Question Attempts: 0 of 3 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

Answer :-

a)Given,

Future value of Note = $501,000

Time (n) = 3 years

Interest rate (r) = 12%

Then Present Value of note = Future Value of Note / ( 1 + r )ⁿ

Present value of Note = $501,000 / ( 1 + 12%)³

Present value of Note = $356,602

The amount the land should be recorded at January 1, 2020 is $356,602, which is equal to Present value of Note.

Interest Expenses = Land amount × Interest rate

Interest expense = $356,602 × 12%

Interest Expense = $42,792

(b)Journal entry to record this transaction :-

Account Title and Explanation	Debit	Credit
Cash A/c. Dr.	$4,700,000
Discount on notes notes payable A/c. Dr.	$1,245,360
To Notes Payable A/c		$4,700,000
To Unearned revenue A/c		$1,245,360

Note :-

Unearned revenue = Face value - Present value of Note

Present Value of note = Future Value of Note / ( 1 + r )ⁿ

Time (n) = 4 years

Interest rate (r) = 8%

Future value of Note = Face value of Note = $4,700,000

Unearned revenue = $4,700,000 - {$4,700,000 /( 1 + 8 %)⁴}

Unearned revenue = $4,700,000 - $3,454,640

Unearned revenue = $1,245,360

.

Now we calculated the Interest expense to be reported for 2020 :-

Interest Expense = Present value of Note × Interest rate

In above we calculated the present value of Note = $3,454,640

Interest Expense = $3,454,640 × 8% = $276,371

Interest Expense = $276,371