Question

On January 1, 2017, Sandhill Inc. purchased land that had an assessed value of $322,000 at the time of purchase. A $517,000, 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.

Answer 1

Answer:

Land amount= 367,990

Interest amount= 149,010

Explanation:

this question can be solve applying the concept of future value, as it is a zero interest or zero coupon it only, it means the bond does not pay money in the time, so

$FV=PV*(1+i)^{n}$

where FV is future value, PV is the present value, i is the periodic interest rate and n is the number of periods. So applying to this particular problem we have:

$517,000=PV*(1+0.12)^{3}$

solving we have PV=367,990

so the land value is 367,990 and the interest expenses are 517,000 - 367,990=149,010