On January 1, 2017, Alvin Corp.sold property to Marvin Ltd., for which Alvin had originally paid $570,000.There was no established exchange price for this property.Marvin gave Alvin a $900,000, zero-interest-bearing note, payable in three equal annual instalments of $300,000, with the first payment due December 31, 2017.The note also has no ready market.The market rate of interest for a note of this type is 10%.The present value of a $900,000 note payable in three equal annual instalments of $300,000 at 10% is $746,056.To the nearest dollar, and using the effective-interest method, how much interest revenue should Alvin recognize in 2017?

Question

Quizplus · Accepted Answer

Under the effective-interest method, interest revenue is calculated by applying the market rate of interest to the carrying amount of the note. In this case, the carrying amount of the note is the present value of the future cash flows, which is $746,056. Therefore, the interest revenue for 2017 is 10% of $746,056, which is $74,605.60 or $74,606 to the nearest dollar. Choice C is the closest option.