On January 1, 2017, Queen Ltd.sold property to King Company.There was no established exchange price for the property, and King gave Queen a $3,000,000, zero-interest-bearing note payable in five equal annual instalments of $600,000, with the first payment due December 31, 2017.The market rate of interest for a note of this type is 9%.The present value of the note at 9% was $2,333,791 at January 1, 2017.What should be the balance of the Note Payable to Queen Ltd.account on King's December 31, 2017 adjusted trial balance, assuming that the note is recorded at net and the effective-interest method is used? (Round to the nearest dollar, if necessary.)

Question

Quizplus · Accepted Answer

Using the effective-interest method, the interest expense for the first year would be:

Interest expense = Beginning balance x Effective interest rate
= $2,333,791 x 9%
= $209,037

The amount of principal paid would be the total annual payment of $600,000 minus the interest expense of $209,037, or $390,963.

Therefore, the balance of the Note Payable to Queen Ltd. on King's December 31, 2017 adjusted trial balance would be:

Beginning balance - Principal paid = $2,333,791 - $390,963 = $1,942,828

Rounding to the nearest dollar, the answer is A) $1,943,832.