Question

On June 30, 2018, Kimberly Farms purchased custom-made harvesting equipment from a local producer. In payment, Kimberly signed a noninterest-bearing note requiring the payment of $60,000 in two years. The fair value of the equipment is not known, but an 8% interest rate properly reflects the time value of money for this type of loan agreement. At what amount will Kimberly initially value the equipment? How much interest expense will Kimberly recognize in its income statement for this note for the year ended December 31, 2018?

Answer 1

$2,058

Step-by-step explanation:

Present value = Amount * (Present value of $1: n=2, i=8%)

Present value = $60,000 * 0.85734

Present value = $51,440

Interest expenses = Initial value of equipment * Interest rate * Number of years

Interest expenses = $51,440 * 8% * 6/12

Interest expenses = $2,058