Question

On January 2, year 1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, year 1, was 10%. The present value of $1 at 10% for three periods is 0.75. In Emme's year 1 income statement, what amount should be reported as interest income?

a. $9,000
b. $45,000
c. $50,000
d. $60,000

Answer 1

$45,000

At 12/31/Y1, interest income would be recognized using the effective interest method. Using this method, interest is computing by multiplying the book value of the note ($600,000 - $150,000 = $450,000) by the effective interest rate ($450,000 × 10% = $45,000).
Roth. The note, made at usual trade terms,