On January 1, 2007, Abel Co.exchanged equipment for a $160,000 noninterest-bearing note due on January 1, 2010.The prevailing rate of interest for a note of this type at January 1, 2007 was 10%.The present value of $1 at 10% for three periods is 0.75.What amount of interest revenue should be included in Abel's 2008 income statement?
A)$0
B)$12,000
C)$13,200
D)$16,000

Question

Quizplus · Accepted Answer

The interest revenue for 2008 can be calculated by finding the carrying value of the note on January 1, 2008, which is the present value of the remaining payments discounted at the prevailing rate of interest at that time (10%). The carrying value on January 1, 2008 is calculated as follows:

Present value of remaining payments = $160,000 x 0.75 = $120,000
Carrying value on January 1, 2008 = Present value of remaining payments - Deferred interest from prior years
                               = $120,000 - ($160,000 x 0.10 x 1) = $104,000
Interest revenue for 2008 = Carrying value on January 1, 2008 x Prevailing interest rate for 2008
                                   = $104,000 x 0.10 = $10,400
Therefore, the correct answer is C. $13,200 is the interest revenue for 2009, and $16,000 is the interest revenue for 2010. $0 is incorrect because there is interest revenue associated with the note.