Question

On January 1, 2021, Crane Company sold property to Wildhorse Company. There was no established exchange price for the property, and Wildhorse gave Crane a $5400000 zero-interest-bearing note payable in 5 equal annual installments of $1080000, with the first payment due December 31, 2021. The prevailing rate of interest for a note of this type is 10%. The present value of the note at 10% was $4094064 at January 1, 2021. What should be the balance of the Discount on Notes Payable account on the books of Wildhorse at December 31, 2021 after adjusting entries are made, assuming that the effective-interest method is used?

Answer 1

Answer:

interest expense    409,406.4 debit

           note payable              409,406.4 credit

Explanation:

We have to apply the market rate to the carrying value of the note payable:

$4,094,064 x 10% = 409,406.4 interest expense

We will increase the note payable and declare the interest expense

Then, at payment we decrease our note payable account against cash.