Question
On January 1, 2026 Fieldmark Farm Equipment bought a harvester and paid for it by issuing a note that requires a single payment of $121,000 on December 31, 2027. The note carries no stated interest. Fieldmark's borrowing rate for a loan like this is 10%.
Under IFRS 9 the note is recognised at fair value (the present value of the payment) and then measured at amortised cost using the effective-interest method, with no separate discount account. Ignore depreciation of the harvester.
Required:
- Initial Amount — the amount at which the harvester and the note are first recorded.
- Journal Entries — the purchase on January 1, 2026; interest on December 31, 2026 and December 31, 2027; and the payment on December 31, 2027.
- Statement Impact — the effect of the December 31, 2026 interest entry.
Statements in this challenge
- Initial AmountNumeric Answer
- Journal EntriesJournal Entry
- Statement ImpactStatement Impact
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IFRS 9 — financial liabilities
Interest accrues on the outstanding principal for the time the note has been outstanding, whether or not it has been paid. At the period end split the obligation between the current and non-current portions if the note runs beyond twelve months.
Common mistakes
- Omitting accrued interest at the period end because no payment has fallen due.
- Presenting the whole balance as non-current when part matures within a year.
- Applying the annual rate without pro-rating for the months outstanding.