EXERCISE 3

1. Air Charter Service (ACS) wants to purchase an airplane for use in its
charter tour business.  The airplane will cost $220,000. ACS will pay
$20,000 in cash and borrow the remaining amount using five-year note
bearing interest at 10%.  The market rate of interest for a note of similar
risk is 12 percent. Journalize the transaction form beginning to the end of
payment.

2. On January 1, 2019, 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, 2022, was given in exchange. There was no
established exchange price for the land, nor a ready market price for the
note. The interest rate charged on a note of this type is 12%. Prepare
the journal entry to record this transaction and determine at what
amount the land should be recorded at January 1, 2019, and the interest
expense to be reported in 2019 related to this transaction.

3. Halvor Corporation is having financial difficulty and therefore has asked

Manhattan National Bank to restructure its €3 million note outstanding.
The present note has 3 years remaining and pays a current rate of
interest of 10%. The present market rate for a loan of this nature is
12%. The note was issued at its face value.

Instructions:
Prepare below are three independent situations. Prepare the journal
entry that Halvor would make for each of these restructurings.
a) Manhattan National Bank agrees to take an equity interest in Halvor
by accepting ordinary shares valued at €2,200,000 in exchange for
relinquishing its claim on this note. The ordinary shares have a par
value of €1,000,000.
b) Manhattan National Bank agrees to accept land in exchange for
relinquishing its claim on this note. The land has a book value of
€1,950,000 and a fair value of €2,400,000.
c) Manhattan National Bank agrees to modify the terms of the note,
indicating that Halvor does not have to pay interest on the note over
the 3-year period.