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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?

Respuesta :

akiran007

Answer:

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                                              xxxxx

Less

Depreciation                               xxxxx

Interest Expense                        4290

Profit                                                         xxxx

2. Income Statement of 2022

Revenues                                              xxxxx

Less

Depreciation                               xxxxx

Interest Expense                        4290

Profit                                                         xxxx

3. Balance Sheet of 2021

Debit Side

Truck                        $45000

Less Depreciation      xxxxx

Credit Side

Interest Payable   4290

3. Balance Sheet of 2022

Debit Side

Truck                        $45000

Less Depreciation      xxxxx

Credit Side

Interest Payable   4290

Answer Part 1:

1. The Journal Entry

  • The journal entry to record the acquisition of the tractor.

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

  • Interest Expenses to be reported :

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)

  • Amount liability in the balance sheet:

Of 2021 = $39000+$4290=$43290

Of 2022=$43290+$4822=$4822

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