Baker Inc. acquired equipment from the manufacturer on 10/1/2013 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2014 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2013 year-end financial statements, what is its imputed annual interest rate?

Question

Quizplus · Accepted Answer

To calculate the imputed annual interest rate, we can use the formula:

Interest = Principal x Rate x Time

In this case, we know the principal ($918,000) and the time (from 10/1/2013 to 12/31/2013, or 3 months). We also know the interest expense ($9,000).

Plugging in the numbers, we get:

$9,000 = $918,000 x Rate x (3/12)

Solving for Rate, we get:

Rate = $9,000 / ($918,000 x 0.25)
Rate = 0.04 or 4%

Therefore, the imputed annual interest rate is 4%.

Baker Inc Acquired Equipment from the Manufacturer on 10/1/2013 and Gave