Question

sold equipment to Hemingway Co. for a 2-year, $80,000, zero-interest-bearing note. The prevailing rate of interest for a note of this type at January 1, 2020 was 10%. The present value of $1 at 10% for two periods is 0.83. What amount of interest revenue should be included in Kohl's 2021 income statement?

Answer 1

$6,800 interest Income in 2021

Step-by-step explanation:

Note will be recorded using Face value. Discount on Note is the difference between the face value and present value of future cash flows. Bond is zero interest bearing and It will only pay $80,000 after 2 years.

Use following formula to calculate present value.

Present value = FV x Discount factor

FV = $80,000

Time period = 2 years

Discount factor at 10% for 2 years = 0.83

Present value = $80,000 x 0.83 = $66,400

Discount on the bond = $80,000 - $66,400 = $13,600

It will be amortized on two year, as $6,800 ($13,600 / 2) per year.