Presented below are two independent situations: (a) On January 1, 2017, Blue Inc

Question

Presented below are two independent situations:

(a) On January 1, 2017, Blue Inc. purchased land that had an assessed value of $373,000 at the time of purchase. A $549,000, 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. (Round answers to 0 decimal places, e.g. 38,548.)

(b) On January 1, 2017, Kingbird Furniture Co. borrowed $5,900,000 (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, Kingbird Furniture agreed to sell furniture to this customer at lower than market price. A 9% 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 2017. (Round answer to 0 decimal places, e.g. 38,548.)

Land to be recorded at January 1, 2017 $

Interest expense to be reported $

Explanation / Answer

(a)

Land to be recorded at January, 2017 = $549,000 x 0.71178* = $423,707

Interest expense to be reported = $423,707 x 0.12 = $50,845

* Present Value of $1 @12% for 3 years = 0.7118

(b)

Discount = $5,900,000 - ($5,900,000 x 0.7084) = $1,720,440

Interest expense to be reported for 2017 = Carrying value of note x Interest rate

Carrying value of note = $5,900,000 - $1,720,440 = $4,179,560

Interest rate = 9%

Interest amount = $4,179,560 x 0.09 = $376,160

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Account Titles and Explanation Debit Credit Cash $5,900,000 Discount on Notes Payable $1,720,440 Notes Payable $5,900,000 Unearned Revenue $1,720,440

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