Zero-interest-bearing notes

Exercise 14-16: Entries for zero-interest-bearing notes, page 823
On January 1, 2013, McLean Company makes the two following acquisitions.
1. Purchases land havinga fair value of $300,000 by issuing a 5-year, zero-interest-bearing promissory note
in the face amount of $505,518.

2. Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank.

Intstructions
(a) Record the two journal entries that should be recorded by McLean Company for the two purchases on January 1, 2013.
b. Record the interest at the end of the first year on both notes using the effective-interest method.
Exercise 14-17: Imputation of interest, page 823
Presented below are two independent situations:
(a) On January 1, 2013, Spartan Inc. purchased land that had an assessed value of $390,000 at the time of purchase.
A $600,000, zero-interest bearing note due January 1, 2016, 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%.
Determine at what amount the land should be recorded at January 1, 2013, and the interest expense to be reported
in 2013 related to this transaction.
(b) On January 1, 2013, Geimer Furniture Co. borrowed $4,000 (face value) from Aurora Co., a major customer, through a
zero-interest-bearing note due in 4 years. Because the note was zero-interest bearing, Geimer Furniture agreed to
sell furniture to this customer at a lower that 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 2013.
Exercise 14-19: Fair value option, page 824
Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit
rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the
fair value option for the long-term notes issued to Barclay’s Bank and has the following data related to the carrying and fair
value for these notes.
Carrying Value Fair Value
December 31, 2012 $54,000 $54,000
December 31, 2013 44,000 42,500
December 31, 2014 36,000 38,000
Instructions:
a. Prepare the journal entry at December 31 (Fallen’s year end) for 2012, 2013, and 2014, to record the fair value option for these notes.
b. At what amount will the note be reported on Fallen’s 2013 balance sheet?
c. What is the effect of recording the fair value option on these notes on Fallen’s 2014 income?
d. Assuming that general market interest rates have been stable over the period, does the fair value data for the notes indicate
that Fallen’s creditworthiness has improved or declined in 2014? Explain.
Problem 14-9: Entries for zero-interest-bearing notes; payable in installments, page 828
Sabonis Cosmetics Co. purchased machinery on Decmeber 31, 2011, paying $50,000 down and agreeing to pay the balance in four
equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions:
a. Prepare the Jouranl entry for thr purchase date on December 31, 2012
b. Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective-interest method) on December 31, 2013.
c. Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2014.


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