Question

On January 1, 2017, 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. Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2017.

Answer 1

Answer:

Explanation:

The journal entry is shown below:

Cash A/c Dr $5,000,000

Discount on note payable $1,585,000

             To Note payable A/c $5,000,000

             To Unearned revenue A/c $1,585,000

(Being the zero-interest-bearing note due in 4 years is recorded)

The computation is shown below:

= Borrowed amount - borrowed amount × PVIF at 10% for 4 years

= $5,000,000 - $5,000,000 × 0.6830

= $5,000,000 - $3,415,000

= $1,585,000

Now the interest expense would be

= ($5,000,000 -  $1,585,000) × 10%

= $3,415,000 × 10%

= $341,500