Question

on december 31, 2025, sheridan co. performed environmental consulting services for hayduke co. hayduke was short of cash, and sheridan co. agreed to accept a $309,400 zero-interest-bearing note due december 31,2027 , as payment in full. hayduke is somewhat of a credit risk and typically borrows funds at a rate of 11%. sheridan is much more creditworthy and has various lines of credit at 7%.

Answer 1

The question is about accounting for a zero-interest-bearing note accepted by Sheridan Co. as payment from Hayduke Co. The note's present value is calculated using the market interest rate of 11%, and interest revenue is recognized over the note's life.

Step-by-step explanation:

The student is asking about an accounting transaction involving the recognition of a zero-interest-bearing note. On December 31, 2025, Sheridan Co. performed services and accepted a $309,400 note due on December 31, 2027, as payment. The note is zero-interest-bearing but must be recorded at its present value using the market interest rate, which is the rate at which Hayduke Co., a credit risk, can borrow funds, since it is the higher of the two rates.

This scenario typically requires the calculation of the present value of the note and the subsequent recognition of interest revenue over the life of the note using the effective interest method.

To record the note, Sheridan Co. would discount the amount using the market interest rate of 11%, which would result in an initial value less than the note's face value of $309,400. The discount on the note represents the interest that Sheridan Co. will recognize as revenue over the two years until the note's maturity at the end of 2027.