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.)

Explanation / Answer

Answer a. Zero Interest bearing Note = $549,000 Amount of Land to be Recorded at Jan 1, 2017 = $549,000 (Face Value of Bond) X 0.71178 (PV Factor 3 years at 12%) Amount of Land to be Recorded at Jan 1, 2017 = $390,767.22 or say $390,767 (Approx.) Interest Expense of 2017 = $390,767 X 12% Interest Expense of 2017 = $46,892.04 or say $46,892 (Approx.) Answer b. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1-Jan Cash          5,900,000 Discount on Notes Payable          1,720,263    Notes Payable          5,900,000    Unearned Revenue          1,720,263 $5,900,000 - ($5,900,000 X 0.70843) (To record the bond issued) Carrying Value of bond          4,179,737 Interest Rate 9% Interest Expense - 2017              376,176

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