E14-17. (Imputation of Interest)

Presented below are two independent situations.

 (a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of \$350,000 at the time of purchase. A \$550,000, 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. (b) On January 1, 2014, Field Furniture Co. borrowed \$5,000,000 (face value) from Gary Sinise Co., a major customer, through a zero-interest-bearing note due in 4 years. Because the note was zero-interest-bearing, Field Furniture agreed to sell furniture to this customer at lower than market price. A 10% rate of interest is normally charged on this type of loan. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.

a) Zero-Interest-bearing note 600,000

PV factor-3 years at 12% .71178

Amount of land to be recorded at Jan. 1, 2014 \$427,068

Carrying Value of note 427,068

X 12% interest rate .12

Interest Expense to be recorded in 2014 \$51,248

b) Cash 4,000,000

Discount on notes payable 1,267,960

Notes payable 4,000,000

Unearned Revenue 1,267,960

*4,000,000-(4,000,000x .68301)= 1.267,960 [PV .68301-4 years/10%]

Carrying value of the note 2,732,040

X 10% interest rate .10

Interest expense to be recorded for 2014 \$273,204

*4,000,000-1,267,960= 2,732,040

The question is;

This one you have to use the present value in the “A” part for 3 years at 12%. How did you come up with this factor. What part of the “A” scenario caused you to pick this factor?

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