Question: On December 31 2017 Chauvin Inc purchased land and building

On December 31, 2017, Chauvin Inc. purchased land and building from a developer for $22 million. Chauvin paid $6 million in cash when the deal closed and the developer financed the remainder by giving Chauvin a four year, $16 million interest-free loan. Under the terms of the loan, Chauvin is required to pay $4 million on December 31 of each of the next four years. Assume the market rate of interest on financing of this type is 5 percent.

a. How much should Chauvin report as a liability for the loan on its balance sheet on December 31, 2017 through 2021? What would the interest expense be each year?
b. Why isn't it appropriate to record the liability initially at $16 million? What is the impact on the financial statements of recording the liability at this amount?

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  • CreatedFebruary 26, 2015
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