On January 1, 2011, Williams Company lent $17,800 cash to Stone Company. The promissory note made by Stone for $20,000 did not bear explicit interest and was due on December 31, 2013. No other rights or privileges were exchanged. The prevailing interest rate for a loan of this type was six percent.
Assume that the present value of $1 for two periods at six percent is .89. Stone should recognize interest expense in 2011 of

Question

Quizplus · Accepted Answer

Even though the promissory note did not bear explicit interest, interest must still be recognized using the effective interest method. The effective interest rate for a loan of this type is six percent, so Stone should recognize interest expense for 2011 of $17,800 x 6% x 1/2 (since the loan was outstanding for half the year) = $1,068.

On January 1, 2011, Williams Company Lent $17,800 Cash to Stone