Use the following information for questions 44-46.
On December 31, 2020, Diaz Corp. is in financial difficulty and cannot pay a $ 900,000 note with $ 90,000 accrued interest payable to Cameron Ltd., which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $ 435,000, an original cost of $ 720,000, and accumulated depreciation of $ 345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2022, reduces the face amount of the note to $ 375,000, and reduces the market interest rate of 6%, with interest payable at the end of each year.
-Diaz should record interest expense for 2020 of
A) $ 0.
B) $ 22,500.
C) $ 45,000.
D) $ 67,500.

Question

Quizplus · Accepted Answer

The interest expense for 2020 is $22,500, which is calculated as follows:Interest expense = (Face amount of note * Market interest rate) - (Fair value of equipment / Number of years to maturity)= ($375,000 * 6%) - ($435,000 / 2)= $22,500

Use the Following Information for Questions 44-46