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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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  1. 14 June, 10:46
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    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
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