Question

On January 1, 2020, Jet Air Inc. contracted with Systems Plus Inc. to manufacture heavy equipment. Jet Air Inc. issued a $67,500 note to Systems Plus Inc. in exchange for the equipment that required 5% interest payments annually over 3 years on December 31 of each year. Although the fair value of the customized heavy equipment was not reasonably determinable, it was determined that 10% was a reasonable rate of interest for such a transaction. Provide journal entries to be made by Jet Air Inc. at each of the following dates. a. January 1, 2020 ---Date of note issuance. b. December 31, 2020 ---Date of interest payment. c. December 31, 2021 ---Date of interest payment. d. December 31, 2022 ---Date of interest payment. e. December 31, 2022 ---Date of note payment at maturity.

Answer 1

Solution:

Table values are based on:
n=	3
i=	10.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.75131	$67,500.00	$50,714
Interest (Annuity)	2.48685	$3,375.00	$8,393
Fair value of equipment			$59,107

Note Amortization Schedule
Date	Cash paid	Interest expense	Discount amortized	Unamortized discount	Carrying value of N/P
1-Jan-20				$8,393	$59,107
31-Dec-20	$3,375	$5,911	$2,536	$5,857	$61,643
31-Dec-21	$3,375	$6,164	$2,789	$3,068	$64,432
31-Dec-22	$3,375	$6,443	$3,068	$0	$67,500

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-20	Equipment Dr	$59,107.00
	Discount on Notes payable Dr	$8,393.00
	To Notes payable		$67,500.00
	(To record purchase of land by issuing note)
31-Dec-20	Interest expense Dr	$5,911.00
	To Discount on Notes payable		$2,536.00
	To Cash		$3,375.00
	(To record interest payment)
31-Dec-21	Interest expense Dr	$6,164.00
	To Discount on Notes payable		$2,789.00
	To Cash		$3,375.00
	(To record interest payment)
31-Dec-22	Interest expense Dr	$6,443.00
	To Discount on Notes payable		$3,068.00
	To Cash		$3,375.00
	(To record interest payment)
31-Dec-22	Notes payable Dr	$67,500.00
	To Cash		$67,500.00
	(To record note payment at maturity)