Imputation of Interest Presented below are two independent sit
(Imputation of Interest) Presented below are two independent situations:
(a) On January 1, 2011, 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, 2014, was given in exchange. There was no established exchange price for the land, nor a ready market 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, 2011, and the interest expense to be reported in 2011 related to this transaction.
(b) On January 1, 2011, Geimer Furniture Co. borrowed $4,000,000 (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 lower than 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 2011.