On January 1, 2011, Li Company purchased equipment from Keiko Distributors.There was no established market price for the equipment which has a 10 year life and no salvage value Li gave Keiko a HK$200,000 zero-interest-bearing note payable in 5 equal annual installments of HK$40,000, with the first payment due December 31, 2011.The prevailing rate of interest for a note of this type is 9%.The present value of the note at 9% was HK$144,200.Assuming that Li uses the straight-line method of depreciation, what amounts will be reported on the company's 2011 income statement for interest expense and depreciation expense for the note and equipment?

Question

Quizplus · Accepted Answer

The present value of the note is HK$144,200, which is less than the face amount of HK$200,000. This means that Li is paying less than the fair value of the equipment, and the difference is considered to be interest expense. The interest expense for 2011 is HK$12,978 (HK$200,000 - HK$144,200) / 5. The depreciation expense for 2011 is HK$14,420 (HK$200,000 / 10).

On January 1, 2011, Li Company Purchased Equipment from Keiko