On January 1, 2014, Crown Company sold property to Leary Company. There was no e

Question

On January 1, 2014, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $4,000,000 zero-interest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2014. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,884,000 at January 1, 2014. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2014 after adjusting entries are made, assuming that the effective-interest method is used?

Explanation / Answer

on 31 Dec 9% on $2884000 will be effective amout which will be amortize 2884000*.09 259560 Discount on Note payble $1,116,000 Less: amortize 259560 balance of Discount on 31 Dec 2014 $856,440 Ans Property 2884000 Discount on Note payble $1,116,000 Notes payable 4000000 Interest Expense 259560 Discount on Notes payable 259560

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