Presented below are two independent situations. a. On January 1, 2020, 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, 2023, 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, 2020, and the interest expense to be reported in 2020 related to this transaction.
b. On January 1, 2020, Field Furniture borrowed $5,000,000 (face value) from 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 2020.

a)Interest expense for Year 2020=$46, 977.50 b) see explanation column

Explanation:

a) Amount of Note payable =  $550,000

Present Value  factor for 3 years at 12%

= PV = 1/(1+r) ^n  

1/ (1+ 12%)^3 =(0.892857143)^ 3 =  0.71178

Present value of Note for land at 2020 = $550,000  x  0.71176 = $391, 479

.136

Interest expense for Year 2020=$391, 479.136  x  12%= $46, 977.50

b) Face value of note = $5,000,000

Present value factor for 4 years at 10 % =

= PV = 1/(1+r) ^n  

1/ (1+ 10%)^4 =(0.909090909)^ 4 =  0.68301345

Present value of the note = $5,000,000 x 0.68301345= $3,415,067.28

Discount on note payable =$5,000,000 -$3,415,067.28 =$1,584,932.72

Journal to record amount of interest to report for 2020

Date   Account                        Debit                      Credit

Jan 2020   Cash                  $5,000,000

Discount on notes payable                             $1,584,932.72  

Notes payable                         $5,000,000

interest revenue                                              $1,584,932.72

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