need help with this problem.
On July 1, 2008, The Reno Rattlers Inc. bought a reconditioned D.C. 3 to cut travel costs for its players to go away to games. The Rattlers paid $1million in cash and signed a promissory note with no stated interest rate for 3.96 million due and payable after 12 months, but renegotiable on June 30, 2009. Under similar circumstances, a bank would charge a company with the same risk profile as the Reno Rattlers 10%p.a. on such a note.
A. Is there any deferred interest on this note? If so, how much on July 1, 2008?
B. What is the purchase value of the DC-3?
C. What entry or entries would you make on July 1, 2008 to record this transaction?
D. What entries, if any should be made on December 31, 2008 re accrued interest expense? Thanks
A. To determine if there is any deferred interest on this note, we need to compare the interest rate charged by the bank (10% p.a.) with the interest rate stated in the promissory note. However, the problem states that the promissory note does not have a stated interest rate. Therefore, we cannot determine if there is any deferred interest on this note.
B. The purchase value of the DC-3 is given as $1 million in cash. This means that the Rattlers paid $1 million to acquire the DC-3.
C. On July 1, 2008, the following entry or entries can be made to record this transaction:
- Debit: DC-3 Aircraft - $1,000,000
- Credit: Cash - $1,000,000
This entry records the purchase of the DC-3 and the cash payment made for it.
D. To determine if any entries should be made on December 31, 2008, we need to consider if there is any accrued interest expense. Since the promissory note has no stated interest rate, we cannot determine the amount of accrued interest expense. Therefore, we cannot make any entries for accrued interest expense on December 31, 2008.