Question

. On January 1, 2024, Byner Company purchased a used tractor. Byner paid $5,000 down and signed a noninterest-bearing note requiring $45,000 to be paid on December 31, 2026. The fair value of the tractor is not determinable. An interest rate of 10% properly reflects the time value of money for this type of loan agreement. The company’s fiscal year-end is December 31.

Prepare the journal entry to record the acquisition of the tractor.
How much interest expense will the company include in its 2024 and 2025 income statements for this note?
What is the amount of the liability the company will report in its 2024 and 2025 balance sheets for this note?

Answer 1

The journal entry to record the acquisition of the tractor is: Debit Tractor $50,000, Credit Notes Payable $45,000, Credit Cash $5,000. The company will include interest expense of $4,500 in its 2024 income statement, and $4,050 in its 2025 income statement. The liability reported in the 2024 balance sheet is $40,500, and in the 2025 balance sheet is $36,450.

Step-by-step explanation:

To record the acquisition of the tractor, the journal entry would be:

Debit: Tractor $50,000 (estimated fair value + purchase price)
Credit: Notes Payable $45,000
Credit: Cash $5,000

The company will include interest expense in its 2024 and 2025 income statements, which can be calculated using the formula:

Interest Expense = Beginning Balance x Interest Rate

For 2024, the interest expense would be $45,000 x 10% = $4,500.
For 2025, the interest expense would be ($45,000 - $4,500) x 10% = $4,050.

The liability the company will report in its 2024 and 2025 balance sheets for this note is the remaining amount of the note payable, which can be calculated as follows:

For 2024, the liability would be $45,000 - $4,500 = $40,500.
For 2025, the liability would be $40,500 - $4,050 = $36,450.