Presented below are two independent situations: (a) On January 1, 2014, Robin Wr

Question

Presented below are two independent situations:

(a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of $385,000 at the time of purchase. A $618,000, zero-interest-bearing note due January 1, 2017, 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, 2014, and the interest expense to be reported in 2014 related to this transaction. (Round answers to 0 decimal places, e.g. 38,548.)

(b) On January 1, 2014, Field Furniture Co. borrowed $4,790,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 5 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 9% rate of interest is normally charged on this type of loan.

Prepare the journal entry to record this transaction. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Determine the amount of interest expense to report for 2014. (Round answer to 0 decimal places, e.g. 38,548.)

Explanation / Answer

Answer:(a)

Land A/C Dr. $439,880.04

Discount on NP A/C Dr. $178,119.96

         To Note Payable A/C                            $618,000

Land to be recorded at January 1, 2014= $618,000 x .71178 =439,880.04

Interest expense to be reported= 439,880.04 x .12 = 52,785.60

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