On January 1, 2020, Jet Air Inc. contracted with Systems Plus Inc. to manufacture heavy equipment. Jet Air Inc. issued a $135,000 note to Systems Plus Inc. in exchange for the equipment that required 5% interest payments annually over 3 years on December 31 of each year. Although the fair value of the customized heavy equipment was not reasonably determinable, it was determined that 10% was a reasonable rate of interest for such a transaction. Provide journal entries to be made by Jet Air Inc. a

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Question:

On January 1, 2020, Jet Air Inc. contracted with Systems Plus Inc. to manufacture heavy equipment. Jet Air Inc. issued a $135,000 note to Systems Plus Inc. in exchange for the equipment that required 5% interest payments annually over 3 years on December 31 of each year. Although the fair value of the customized heavy equipment was not reasonably determinable, it was determined that 10% was a reasonable rate of interest for such a transaction. Provide journal entries to be made by Jet Air Inc. at each of the following dates. a. January 1, 2020 ---Date of note issuance. b. December 31, 2020 ---Date of interest payment. c. December 31, 2021 ---Date of interest payment. d. December 31, 2022 ---Date of interest payment. e. December 31, 2022 ---Date of note payment at maturity. Note: List multiple debits or credits (when applicable) in alphabetical order. Note: Round your answer to the nearest whole dollar. Note: Adjust interest expense in 2022 for any net rounding differences.

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Answer:Jet Air Inc.Journal Entries:a. January 1, 2020 ---Date of note issuance:Debit Equipment $135,000Credit Note Payable $135,000To record the cost of the heavy equipment exchanged with a note.b. December 31, 2020 ---Date of interest payment:Debit Interest Expense $6,750Credit Cash $6,750To record the interest expense for the first year.c. December 31, 2021 ---Date of interest payment. Debit Interest Expense $6,750Credit Cash $6,750To record the interest expense for the second year.d. December 31, 2022 ---Date of interest payment. Debit Interest Expense $6,750Credit Cash $6,750To record the interest expense for the third year.e. December 31, 2022 ---Date of note payment at maturity.Debit Note Payable $135,000Credit Cash $135,000To record the payment of the note at maturity.Explanation:Note Payable for the heavy equipment = $135,000Reasonable rate of interest for the heavy equipment = 10%Fair value of the heavy equipment = $148,500 ($135,00 * 1.10)Discount obtained = $13,500 ($148,500 - $135,000)Required interest = 5% annually = $6,750 ($135,000 * 5%)

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