Question

On January 1, 2018, Byner Company purchased a used tractor Byner paid $3,000 down and signed a noninterest-bearing note requiring $44,000 to be paid on December 31, 2020. The fair value of the tractor is not determinable. An interest rate of11% property reflects the time value of money for this type of loan agreement. The company's fiscal year-end is December 31.
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?

Answer 1

Answer:

tractor   35,127,42 debit

      note payable         32,172.42  credit

     cash                           3,000     credit

--to record issuance--

Note payale end of 2018

39,584.19

note payables at Dec 31th

Note payable at the end of 2019

39,584.19

note payables at Dec 31th

Explanation:

As the note has zero.interest we discount the note to get the present value:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  $44,000.0000  

time   3.00  

rate  0.11

$\frac{44000}{(1 + 0.11)^{3} } = PV$  

PV   32,172.42  

The difference will be a discount that will acrrue interest overtime.

the truck will enter the accounting net of interest charges thus:

3,000 downpayment + 32,127.42 = 35,127.42‬

interest will be: 32,127.42 x 1.11 = 32,127.41

Then, do the same for 2019

(32,127.41 + 3,532.0162) x 1.11 = 39,584.19