On December 31, 2014, Hecla Inc. (Hecla) purchased heavy equipment from a dealer. The dealer, through the manufacturer, financed the purchase by giving Rowena a three-year, $300,000 interest-free loan. Under the terms of the loan, Rowena is required to pay $100,000 on December 31 of each of the next three years. Assume the market rate of interest on financing of this type is 6 percent.

Required:

a. How much should Rowena report as a liability for the loan on its balance sheet on December 31, 2009 through 2012? What would the interest expense be each year?

b. Why isn’t it appropriate to record the liability initially at $300,000? What are the consequences for the financial statements of recording the liability at this amount?