Question

On January 1, 2020, Field Furniture borrowed $5,000,000 (face value) from 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.

Required:
Prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2020.

Answer 1

Interest = $ 500,000

Step-by-step explanation:

Field Furniture

Journal Entries

Sr. No Particulars Debit Credit

1 Cash $5,000,000

Notes Payable $5,000,000

Recording Of borrowing $5,000,000 (face value) from Sinise Co., a major customer, through a zero-interest-bearing note.

2. Interest Expense $ 500,000

Interest Payable $ 500,000

Recording of Interest Expense at the End of 2020.

Calculation of Interest Expense

Interest = Principal Amount * Interest Rate

$5,000,000 *10 %= $ 500,000