On January 1, 2017, Crown Company sold property to Leary Company. There was no e

Question

On January 1, 2017, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $4,000,000 zero-interest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2017. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,884,000 at January 1, 2017. Assuming that Leary has a calendar year end fiscal year, how much interest expense should Leary Company report for the year ended December 31, 2018 related to this note?

Explanation / Answer

Balance on january 1 recorded = 2884000

Interest for year 2017 = 2884000 * 9% = 259560

Instalment paid = 800000

Closing balance of 2017 = opening + interest - installment

= 2884000 + 259560 - 800000 = 2343560

Interest expense of 2018 = 2343560 * 9 % = 210920.4

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.