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%)
