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.

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Business

Nathan Haney

14 June, 06:52

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.

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Cason Benton · Answer 1

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