Lester Company received a seven-year zero-interest-bearing note on February 22, 2014, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2014, 7.5% on December 31, 2014, 7.7% on February 22, 2015, and 8% on December 31, 2015. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2014 and 2015, respectively?

Question

Quizplus · Accepted Answer

The interest rate used to calculate interest revenue for a zero-interest-bearing note should be the prevailing rate at the time the note was issued, which was 7% on February 22, 2014. This rate is used for the duration of the note, regardless of changes in interest rates after the issuance date.

Lester Company Received a Seven-Year Zero-Interest-Bearing Note on February 22