Question

On January 1, 2020, Jet Air Inc. contracted with Systems Plus Inc. to manufacture heavy equipment. Jet Air Inc. issued a $135,000 note to Systems Plus Inc. in exchange for the equipment that required 5% interest payments annually over 3 years on December 31 of each year. Although the fair value of the customized heavy equipment was not reasonably determinable, it was determined that 10% was a reasonable rate of interest for such a transaction. Provide journal entries to be made by Jet Air Inc. at each of the following dates. a. January 1, 2020 ---Date of note issuance. b. December 31, 2020 ---Date of interest payment. c. December 31, 2021 ---Date of interest payment. d. December 31, 2022 ---Date of interest payment. e. December 31, 2022 ---Date of note payment at maturity. Note: List multiple debits or credits (when applicable) in alphabetical order. Note: Round your answer to the nearest whole dollar. Note: Adjust interest expense in 2022 for any net rounding differences.

Answer 1

Answer:

Jet Air Inc.

Journal Entries:

a. January 1, 2020 ---Date of note issuance:

Debit Equipment $135,000

Credit Note Payable $135,000

To record the cost of the heavy equipment exchanged with a note.

b. December 31, 2020 ---Date of interest payment:

Debit Interest Expense $6,750

Credit Cash $6,750

To record the interest expense for the first year.

c. December 31, 2021 ---Date of interest payment.

Debit Interest Expense $6,750

Credit Cash $6,750

To record the interest expense for the second year.

d. December 31, 2022 ---Date of interest payment.

Debit Interest Expense $6,750

Credit Cash $6,750

To record the interest expense for the third year.

e. December 31, 2022 ---Date of note payment at maturity.

Debit Note Payable $135,000

Credit Cash $135,000

To record the payment of the note at maturity.

Explanation:

Note Payable for the heavy equipment = $135,000

Reasonable rate of interest for the heavy equipment = 10%

Fair value of the heavy equipment = $148,500 ($135,00 * 1.10)

Discount obtained = $13,500 ($148,500 - $135,000)

Required interest = 5% annually = $6,750 ($135,000 * 5%)