Question

Lester Company received a seven-year zero-interest-bearing note on February 22, 2017, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 6% on February 22, 2017, 6.5% on December 31, 2017, 6.7% on February 22, 2018, and 7% on December 31, 2018. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2017 and 2018, respectively?

Answer 1

The interest rate used for the year ended December 31, 2017, should be 6.5%, and for the year ended December 31, 2018, it should be 7%.

Step-by-step explanation:

The interest rate that should be used to calculate the interest revenue from this transaction for the years ended December 31, 2017 and 2018 can be determined by considering the prevailing interest rates on the specific dates. Since the rate on February 22, 2017, was 6%, and the rate on December 31, 2017, was 6.5%, the interest rate used for the year ended December 31, 2017, should be 6.5%. Similarly, since the rate on February 22, 2018, was 6.7%, and the rate on December 31, 2018, was 7%, the interest rate used for the year ended December 31, 2018, should be 7%.