Question

Chen Incorporated accepted a two-year non-interest-bearing note for $605,000 on January 1, 2024. The note was accepted as payment for merchandise with a fair value of $500,000. The effective interest rate is 10%. The cash collection on December 31, 2025, would be recorded as.

a. $715,000
b. $605,000
c. $500,000
d. $605,000 plus interest

Answer 1

The cash collection on December 31, 2025, would be recorded as $605,000 plus interest.

Step-by-step explanation:

The cash collection on December 31, 2025, would be recorded as d. $605,000 plus interest.

When Chen Incorporated accepted the non-interest-bearing note, its fair value was $500,000. However, since the note has no interest, it needs to be adjusted to its present value using the effective interest rate of 10%. The present value of $605,000 is recorded as the initial cash collection.

Therefore, the cash collection on December 31, 2025, would be the initial cash collection of $605,000 plus any interest that has accrued over the two-year period.