Exhibit 13-03 On January 1, 2014, Train, Inc. accepts an $80,000, non-interest bearing 3 year note in exchange for equipment it sold to Steam Company. Train originally purchased the equipment for $125,000 and had a book value of $75,000 on the date of the sale. The note was non-interest-bearing. An assumed 11% interest rate is implicit in the agreement. Actual information for 11%, three periods, follows:
-Refer to Exhibit 13-03. What amount would Train record as interest income on December 31, 2014?

Question

Exhibit 13-03 On January 1, 2014, Train, Inc. accepts an $80,000, non-interest bearing 3 year note in exchange for equipment it sold to Steam Company. Train originally purchased the equipment for $125,000 and had a book value of $75,000 on the date of the sale. The note was non-interest-bearing. An assumed 11% interest rate is implicit in the agreement. Actual information for 11%, three periods, follows:  
-Refer to Exhibit 13-03. What amount would Train record as interest income on December 31, 2014?

Quizplus · Accepted Answer

To calculate the interest income, we first need to calculate the present value of the note, which is $62,161. Then, we can use the formula: Interest income = Present Value x Implicit Interest Rate.

For the first year, the interest income would be: $62,161 x 11% = $6,838. However, Train would only record the interest income as it accrues over time, so on December 31, 2014, Train would record:

$6,838 x 12/36 = $2,279

Therefore, the correct answer is A, $6,434.

Exhibit 13-03 on January 1, 2014, Train, Inc