Russell Forest Products Limited needed to upgrade a burner at its sawmill in Cochrane, Ontario, to comply with the new air pollution standards. The new burner, which is used to burn the scrap wood from its sawing operations, will not only reduce the amount of pollution, but will supply heat for the plant facility, including the wood dryer. In order to encourage Russell Forest Products Limited in its compliance with the stan- dards, the Province of Ontario extended an interest-free loan of $400,000 on December 31, 2011. The only conditions in obtaining the interest-free loan are that the loan proceeds be applied directly to the construction costs and that the loan be repaid in full on December 31, 2019. RussellForest Products Limited borrowed the remaining funds from the bank for the construction of the burner and will be paying interest at the rate of 7% per year.
(a) Discuss the issues related to obtaining the interest-free loan from the Province of Ontario.
(b) Prepare an amortization table for the loan using the effective interest method. Present the first three years of the loan.
(c) Prepare the entry on December 31, 2011, to record the interest-free loan.
(d) Prepare any adjusting journal entry that is necessary at December 31, 2012, the company’s fiscal year end, concern- ing any interest on the note.