On January 1, 2021, Byner Company purchased a used tractor. Byner paid $6,000 down and signed a noninterest-bearing note requiring $39,000 to be paid on December 31, 2023. 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.
Required:
1. Prepare the journal entry to record the acquisition of the tractor.
2. How much interest expense will the company include in its 2021 and 2022 income statements for this note?
3. What is the amount of the liability the company will report in its 2021 and 2022 balance sheets for this note?

Answer Part 1:

1. The Journal Entry

Sr. No                    Particulars                          Debit                      Credit

       1.               Tractor- Machinery              $ 45000

                             Cash                                                              $6000

                           Notes Payable                                                 $ 39,000

Answer Part 2 :

Formula :

Interest amount = P(1+r)^n -P

Where

r= interest rate =11%

n= time

P= principal amount =$39000

In 2021's income statement= $39000 * 1.11 -$39000=$4290

In 2022's income statement=$39000 * 1.11^2 -$39000 * 1.11=$4822

Answer Part 3)

Of 2021 = $39000+$4290=$43290

Of 2022=$43290+$4822=$4822

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1. The Journal Entry

Sr. No                    Particulars                          Debit                      Credit

                       Tractor- Machinery               $ 45000

                              Cash                                                              $6000

                            Notes Payable                                                 $ 39,000

The journal entry to record the acquisition of the tractor.

Working : Interest Expense Payable:

11% of 39,000= $ 4290

2. Income Statement of 2021

Revenues                                              

Less

Depreciation                              

Interest Expense                        4290

Profit                                                        

2. Income Statement of 2022

Revenues                                              

Less

Depreciation                              

Interest Expense                        4290

Profit                                                        

3. Balance Sheet of 2021

Debit Side

Truck                        $45000

Less Depreciation      

Credit Side

Interest Payable   4290

3. Balance Sheet of 2022

Debit Side

Truck                        $45000

Less Depreciation      

Credit Side

Interest Payable   4290

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