Exhibit 14-11 Hernandez, Ltd.issued a three-year, $100, 000, non-interest-bearing note to a customer on January 1, 2010.Hernandez also agrees to sell inventory to the customer at reduced rates over a five-year period.Hernandez's incremental interest rate is 10%, and the present value of the note is $75, 132.
-
Refer to Exhibit 14-11.If the face value of a note is materially different from the cash sales price of the property it was exchanged for, and the note is recorded at its present value, the correct interest rate to use is the
A)borrower's incremental rate
B)note's stated interest rate
C)the effective interest rate
D)note's implied interest rate

Question

Quizplus · Accepted Answer

The correct interest rate to use is the borrower's incremental rate when the face value of a note is materially different from the cash sales price of the property it was exchanged for, and the note is recorded at its present value.