Question

On January 1, 2007, Garner Company sold property to Agler Company which originally cost Garner $760,000. There was no established exchange price for this property. Agler gave Garner a $1,200,000 zero-interest-bearing note payable in three equal annual installments of $400,000 with the first payment due December 31, 2007. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,200,000 note payable in three equal annual installments of $400,000 at a 10% rate of interest is $994,800. What is the amount of interest expense that should be recognized by Agler in 2008, using the effective-interest method? please work out

Answer 1

Date	Interest Paid	Interest Expense	Discount Amortization	CV before payment	Payment	CV after payment
01-01-2007				994800	0	994800
12/31/2007	$ 0	99480	99480	1094280	400000	694280
12/31/2008	$ 0	69428	69428	763708	400000	363708
12/31/2009	$ 0	36371	36371	400079	400000	0
		36292	36292	400000

1/1/2007	Land	994800
	Discount on Notes Payables	205200
	Notes Payable		1200000
12/31/2007	Interest Expense	99480
	Notes Payable	400000
	Discount on Notes Payable		99480
	Cash		400000
12/31/2008	Interest Expense	69428
	Notes Payable	400000
	Discount on Notes Payable		69428
	Cash		400000
12/31/2009	Interest Expense	36292
	Notes Payable	40000
	Discount on Notes Payable		36292
	Cash		400000