Question

On January 1, 2024, Ball Co. exchanged equipment for a $500,000 zero-interest-bearing note due on January 1, 2027. The prevailing rate of interest for a note of this type at January 1, 2024 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2025 income statement?

Answer 1

The amount of interest revenue that should be included in Ball's 2025 income statement is $41,250

Step-by-step explanation:

Rate of interest January 1, 2024 = 10%.

Present value of $1 at 10% for three periods is 0.75.

Present value of notes receivable = $500,000 × 0.75 = $375,000

Interest recognized in 2024 = $375,000 × 10% = $37,500

Interest recognized in 2025 = $(375,000+37,500) × 10% = $41,250