Question

(Imputation of Interest) Presented below are two independent situations.

(a) On January 1, 2017, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2020, 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, 2017, and the interest expense to be reported in 2017 related to this transaction.

(b) On January 1, 2017, Field Furniture Co. borrowed $5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field 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.

Answer 1

$550.000 Zero-Interest bearing note = Interest rate = PV factor 3 years at 12% = 12% 0.71178 $391,479 Amount the land should be recorded at January 1, 2017 = $550,000 * 0.71178] $46,977 The interest expense to be recorded in 2017 = [$391,479 * 12%] Journal entries: Account Titles and Explanation Land Discount on Note Payable Note Payable (To record the amount of land) Debit Credit $391,479 $158,521 $550.000 b) Zero-Interest bearing note = Interest rate = PV factor 4 years at 10% = $5.000.000 10% 0.68301 $3,415,050 Carrying value of Note Payable [$5,000,000 * 0.68301] Interest expense [$3,415,050 * 10%] $341,505 Debit Journal entries: Account Titles and Explanation Cash Discount on Note Payable Note Payable Unearned Revenue (To record zero-interest-bearing note) Credit $5,000,000 $1,584,950 $5.000.000 $1,584,950 $1,584.950 Unearned Revenue [$5,000,000 - ($5,000,000 * 0.68301)]