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?

a. $37,500.
b. $41,250 .
c. 50,000.
d. $0.

Answer 1

b. $41,250

Step-by-step explanation:

Present value of notes receivable = $500000*0.75

Present value of notes receivable = $375,000

Interest recognized in 2014 = $375,000 * 10%

Interest recognized in 2014 = $37,500

Interest recognized in 2015 = ($375,000 + $37,500) *10%

Interest recognized in 2015 = $412,500 * 10%

Interest recognized in 2015 = $41,250