Purpose: This exercise will illustrate the accounting for the issuance of a note payable to acquire land when the note bears an interest rate that is unreasonably low in relation to the market rate of interest.
On December 31, 2013, Jason Weiss, Inc. purchased land by giving $40,000 in cash and a 3% interest-bearing note with a face value of $500,000. There was no established exchange price for the land, nor a ready market for the note. The land had an assessed value of $320,000 for purposes of taxation by the county. The note is due December 31, 2017. Interest is payable each December 31. Jason's incremental borrowing rate is 10%.
Instructions
(a) Draw a time line for the note and determine the amount to record as the cost of the land.
(b) Prepare the amortization schedule for the note payable.
(c) Determine the amount to report as interest expense on the income statement for the fiscal year ending March 31, 2015.
(d) Determine the amount to report as interest paid on the statement of cash flows for the fiscal year ending March 31, 2015.
(e) Determine the amounts to appear (with respect to the above information) on the balance sheet at March 31, 2015, and indicate the proper classification for each item.