7. On January 1, 2016, Aaron Hotchner loaned $5,795,518 to Stephen Walker Compan

Question

7. On January 1, 2016, Aaron Hotchner loaned $5,795,518 to Stephen Walker Company. A zero-interest- beaing note (face amount, $18 million) was exchanged solely for cash. The note is to be repaid on December 31, 2025. a. What is the effective interest rate on this note? b. Assuming a December 31, 2016 year-end, what is the amount of interest expense to be shown on the income statement of Stephen Walker Company? c. Show how this note would be reported on Stephen Walker Company's December 31, 2016 Balance Sheet.

Explanation / Answer

Answer a. Annuity factor = $5,795,518 / $18,000,000 Annuity factor = 0.32197 Finding the annuity factor in the table (n = 10 Years) Interest Rate (i) = 12% Answer b. Interest Expense = $5,795,518 X 12% Interest Expense = $695,462.16 Answer c. Balance Sheet (Partial) Liabilities Long Term Liabilities Notes Payable - $5,795,518 + $695,462.16    6,490,980.16

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