Two independent situations follow.
1. On January 1, 2014, Spartan Inc. purchased land that had an assessed value of $390,000 at the time of purchase. A $600,000, non-interest-bearing note due on January 1, 2017, was given in exchange. There was no established exchange price for the land, and no ready market value for the note. The interest rate that is normally charged on a note of this type is 12%.
2. On January 1, 2014, Geimer Furniture Ltd. borrowed $4 million (face value) from Aurora Inc., a major customer, through a non-interest-bearing note due in four years. Because the note was non interest-bearing, Geimer 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.
Instructions
(a) For situation 1, determine at what amount the land should be recorded at January 1, 2014, and the interest expense to be reported in 2014 related to this transaction. Discuss how the assessed value of the land could be used in this situation.
(b) For situation 2, prepare the journal entry to record this transaction and determine the amount of interest expense to report for 2014.