Russell Forest Products Limited needed to upgrade a

burner at #1223

Russell Forest Products Limited needed to upgrade a burner at its sawmill in Cochrane, Ontario,
to comply with new air pollution standards. The new burner, which is used to burn the scrap
wood from its sawing operations, will not only reduce the amount of pollution, but will supply
heat for the plant facility, including the wood dryer. In order to encourage Russell Forest
Products Limited in its compliance with the standards, the Province of Ontario extended an
interest-free loan of $400,000 on December 31, 2014. The only conditions in obtaining the
interest-free loan are that the loan proceeds be applied directly to the construction costs and
that the loan be repaid in full on December 31, 2022. Russell Forest Products Limited borrowed
the remaining funds from the bank for the construction of the burner and will be paying interest
at the rate of 7% per year.

Instructions

(a) Discuss the issues related to obtaining the interest-free loan from the Province of Ontario.

(b) Prepare an amortization table for the loan using the effective interest method. Present the
first three years of the loan.

(c) Prepare the entry on December 31, 2014, to record the interest-free loan.

(d) Prepare any adjusting journal entry that is necessary at December 31, 2015, the company's
fiscal year end, concerning any interest on the note.

Russell Forest Products Limited needed to upgrade a burner at

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