On January 1,2014,JG purchased a machine and gave a $30,000 three-year,8% note.The market or "going" interest rate was 12%.The annual interest payments are to be paid on each December 31.On January 1,2014,JG should record the net liability amount determined as follows:
A) Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 8%.
B) Compute the present value of its face amount and the three $2,400 interest amounts by using a discount rate of 12%.
C) Use its face amount, $30,000 plus the $7,200 interest.
D) Use its face amount, $30,000 minus $7,200 interest.

Question

Quizplus · Accepted Answer

The present value of the note should be calculated using the market interest rate of 12%, not the stated rate of 8%, to reflect the true cost of borrowing.

On January 1,2014,JG Purchased a Machine and Gave a $30,000