On January 1, 2018, Ball Co. exchanged equipment for a £200,000 zero-interest-bearing note due on January 1, 2021. The prevailing rate of interest for a note of this type at January 1, 2018 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2019 income statement?

Question

Quizplus · Accepted Answer

To calculate the interest revenue earned by Ball Co. for 2019, we need to first determine the present value of the note as of January 1, 2019.

The note has a face value of £200,000 and is zero-interest-bearing, meaning that the only source of interest revenue will be from the difference between the face value and the present value of the note.

To calculate the present value, we can use the present value factor for a three-period, 10% note, which is 0.75.

Present value of note as of January 1, 2019 = £200,000 x 0.75 = £150,000

The note will still be due for £200,000 on January 1, 2021, so the remaining balance as of January 1, 2019 will be:

Remaining balance on the note = £200,000 - £150,000 = £50,000

Therefore, the interest revenue earned by Ball Co. in 2019 will be the difference between the beginning and ending balances, which is:

Interest revenue for 2019 = £50,000 x 10% = £5,000

However, since the note is zero-interest-bearing, the interest revenue earned cannot be recognized as actual cash received, but must be imputed using the imputed interest rate of 10%.

Therefore, the interest revenue to be recognized in Ball's 2019 income statement will be the imputed interest based on the beginning balance of the note, which is:

Imputed interest for 2019 = £150,000 x 10% = £15,000

Therefore, the correct answer is C, £16,500, which represents the imputed interest revenue to be recognized in Ball's 2019 income statement.