Answer: a)Interest expense for Year 2020=$46, 977.50 b) see explanation column
Explanation:
a) Amount of Note payable = $550,000
Present Value factor for 3 years at 12%
= PV = 1/(1+r) ^n
1/ (1+ 12%)^3 =(0.892857143)^ 3 = 0.71178
Present value of Note for land at 2020 = $550,000 x 0.71176 = $391, 479
.136
Interest expense for Year 2020= $391, 479.136 x 12%= $46, 977.50
b) Face value of note = $5,000,000
Present value factor for 4 years at 10 % =
= PV = 1/(1+r) ^n
1/ (1+ 10%)^4 =(0.909090909)^ 4 = 0.68301345
Present value of the note = $5,000,000 x 0.68301345= $3,415,067.28
Discount on note payable =$5,000,000 -$3,415,067.28 =$1,584,932.72
Journal to record amount of interest to report for 2020
Date Account Debit Credit
Jan 2020 Cash $5,000,000
Discount on notes payable $1,584,932.72
Notes payable $5,000,000
interest revenue $1,584,932.72
