Cookie Ltd. receives a four-year, $100,000 zero-interest-bearing note. The present value of this note is $82,270. Interest income to be recognized for calendar 2021 will be

Question

Quizplus · Accepted Answer

To calculate interest income, we need to use the effective interest method. The present value of the note ($82,270) is the present value of the principal ($100,000) and the interest payments ($17,730) over four years. This means that the interest payments are $4,432.50 per year. Since there is no stated interest rate, we need to calculate the effective interest rate:

Effective interest rate = (Future value / Present value)^(1/n) - 1
Effective interest rate = (100,000 / 82,270)^(1/4) - 1
Effective interest rate = 5.5%

Therefore, the interest income for 2021 (the first year) is:

Interest income = Beginning carrying value x Effective interest rate
Interest income = $82,270 x 5.5%
Interest income = $4,319.18

So, the best choice is B.