On January 1 2018 Byner Company purchased a used tractor Byn

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?
  

Solution

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