E14-17B (L03) (Imputation of Interest) Presented below are twoindependent situations:
(a) On January 1, 2017, Excess Inc. purchased undeveloped landthat had an assessed value of $261,000 at the time of purchase. A$500,000, zero-interest-bearing note due January 1, 2022, was givenin exchange. There was no established exchange price for the land,nor a ready market value for the note. The interest rate charged ona note of this type is 15%. Determine at what amount the landshould be recorded at January 1, 2017, and the interest expense tobe reported in 2017 related to this transaction.
(b) On January 1, 2017, DonnAll Diamond borrowed $1,000,000(face value) from Allstar Co., a major customer, through azero-interest-bearing note due in 3 years. Because the note waszero-interest-bearing, DonnAll agreed to sell diamonds to thiscustomer at lower than market price. A 12% rate of interest isnormally charged on this type of loan. Prepare the journal entry torecord this transaction and determine the amount of interestexpense to report for 2017.
