Baker Inc.acquired equipment from the manufacturer on 10/1/2016 and gave a noninterest-bearing note in exchange.Baker is obligated to pay $918,000 on 4/1/2017 to satisfy the obligation in full.If Baker accrued interest of $9,000 on the note in its 2016 year-end financial statements,what is its imputed annual interest rate?

Question

Quizplus · Accepted Answer

To find the imputed annual interest rate, we need to use the formula PV = FV / (1 + r)^n, where PV is the present value (or amount of the note), FV is the future value (or amount to be paid), r is the annual interest rate, and n is the number of periods (in years). In this case, we have PV = $918,000 (amount to be paid), FV = $918,000 + $9,000 (note amount + accrued interest) = $927,000, n = 6/12 = 0.5 years (since the note was issued on 10/1/2016 and payable on 4/1/2017), and we want to find r. Plugging in the values, we get:

$918,000 = $927,000 / (1 + r)^0.5

Solving for r, we get:

r = 3.99%

Therefore, the imputed annual interest rate is approximately 4%. The closest answer choice is B.

Baker Incacquired Equipment from the Manufacturer on 10/1/2016 and Gave a a Noninterest-Bearing