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 of 11% properly reflects the time value of money for this type of loan agreement. The company’s fiscal year-end is December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

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

	Event	Account Titles and Explaination	Debit	Credit
	1	Tractor	$ 35,172
		Discount on Note Payable	$ 11,828
		Cash		$      3,000
		Note Payable		$   44,000
		(Being Tractor acquired)
		Workings:
		Tractor:
		Cash	=	$      3,000
		Present Value	=	$   32,172
		Total	=	$   35,172
		Present Value:
		$44,000 X 0.73119	=	$   32,172
		Present Value of $1: n=3, i=11%,(from PV of $1) = 0.73119
2			2018	2019
		Interest expense	$   3,539	$      3,928
		Workings:
	2018	Interest expense	=	$32,172 X 11%
			=	$      3,539
	2019	Interest expense	=	($32,172 + $3,539) X 11%
			=	$      3,928
3			2018	2019
		Liability amount	$ 35,711	$   39,640
		Workings:
	2018	Liability amount	=	$44,000 - ($11,828 - $3,539)
			=	$   35,711
	2019	Liability amount	=	$44,000 - ($11,828 - $3,539 - $3,928)
			=	$   39,640