On January 1, 2018, A Corporation made a loan to B Corporation. The note documen

Question

On January 1, 2018, A Corporation made a loan to B Corporation. The note documenting this loan agreement is a zero-interest bearing note. The terms of the note require B to pay A $30,000 on January 1, 2020. The market (effective) rate of interest for the level of risk in this situation is 6%. 2. Prepare a discount amortization schedule and show how the not will be reported in the balance sheet as of Dec. 31,2018 and Dec. 31, 2019.

What effect does the note have on the income statement for the years ending December 31, 2018, December 31, 2019 and December 31, 2020?

Explanation / Answer

Solution:

maturity value of note = $30,000

Effective rate of interest = 6%

Maturity period = 2 years

Discounted value of note = $30,000 / (1+0.06)^2 = $26,700

Discount on note = $30000 - $26,700 = $3,300

Effect on income statement:

December 31, 2018 - Recognition of interest expense = $1,602

December 31, 2019 - Recognition of interest expense = $1,698

December 31, 2020 - No effect on income statement

Discount amortization schedule - Note Date Interest Expense Discount amortized Carrying value of note 1-Jan-18 $26,700.00 1-Jan-19 $1,602.00 $1,602.00 $28,302.00 1-Jan-20 $1,698.00 $1,698.00 $30,000.00

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