On January 1, 2018, Byner Company purchased a used tractor. Byner paid $6,000 do

Question

On January 1, 2018, Byner Company purchased a used tractor. Byner paid $6,000 down and signed a noninterest-bearing note requiring $38,000 to be paid on December 31, 2020. The fair value of the tractor is not determinable. An interest rate of 10% properly reflects the time value of money for this type of loan agreement. The company's fiscal year-end is December 31, EV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare the journal entry to record the acquisition of the tractor. 2. How much interest expense will the company include in its 2018 and 2019 income statements for this note? 3. What is the amount of the liability the company will report in its 2018 and 2019 balance sheets for this note?

Explanation / Answer

Note : Present Value of noninterest - bearing note to be paid on December 31, 2020

= Amount to be paid * PVIF (10 % , 3 Years) = $38,000 * 0.75131 = $28,549.78 or $28,550

Answer 1

Journal Entry

Answer 2

Interest Expense for 2018 = $28,550 * 10 % = $2,855

Interest Expense for 2018 = ($28,550 + $2,855) * 10 % = $3,140.50

Answer 3

Amount of Liability for 2018 = $28,550 + $2,855 = $31,405

Amount of Liability for 2019  = $31,405 + $3,140.50 = $34,545.50

Note : As the factors table applicable for the question is not attached here , I had used value upto 5 decimal points. Kindly cross check the factor value given for the question .

Date Particulars Debit ($) Credit ($) January 1 , 2018 Tractor ($6,000 + $28,550 ) 34,550 Discount on note payable ($38,000 - $28,550) 9,450 Cash 6,000 Note payable 38,000

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