Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co.in exchange for Cash on 1/1/16.Coffee Co.promises to repay $500,000 at maturity.The market rate on 1/1/16 was 4%.How much Interest Revenue will Trader Trust record on this note in 2016?

Question

Quizplus · Accepted Answer

Even though the note is non-interest bearing, Trader Trust will still accrue interest income on the note based on the market rate at the time the note was accepted. The interest revenue for 2016 is calculated as: $500,000 x 4% = $20,000, but since the note was only held for a portion of the year, the amount of interest revenue recognized in 2016 is ($20,000 x 6/12) = $10,000. This is equivalent to ($500,000 x 4% x 6/12) = $13,511 rounded to the nearest dollar. Therefore, the correct answer is B.

Trader Trust Accepts a $500,000 Non-Interest Bearing 10-Year Note from Coffee