Question 1: On January 1, 2014, Robin 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, 2017, 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%.
Required: Determine at what amount the land should be recorded at January 1, 2014, and the interest expense to be reported in 2014 related to this transaction.
Question 2: On January 1, 2014, Field Furniture Co. borrowed $5,000,000 (face value) from Gary 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.
Required: Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.
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