Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $750,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the interest revenue recorded on June 30, Year 1?

Question

Quizplus · Accepted Answer

The interest revenue is calculated using the market interest rate of 12% because it reflects the effective interest method. The semi-annual interest revenue is $750,000 x 12% / 2 = $45,000. However, since the note was issued at a discount due to the lower stated rate, the interest revenue recognized will be less than $45,000. The correct calculation involves determining the present value of the note and applying the effective interest rate, which results in $41,688.

Bosworth Corporation Accepted a 5-Year Note Receivable from Steelman Company