Question

At January 1, 2021, Kane Company was indebted to Alli Bank under a $500,000, 8% note. The note was signed January 1, 2018, and was due December 31, 2022. Annual interest was last paid on December 31, 2019. Kane was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. Alli Bank agreed to reduce last year's interest and the remaining two years' interest payments to $24,295 each and delay all payments until December 31, 2022, the maturity date. How much interest expense should Kane report approximately for 2022?

Multiple Choice

• $15,649

• $16,686

• $17,523

• $14,421

Answer 1

Answer : $16,686.

Explanation:

Carrying amount as on January 1, 2021, = $500,000 + ($500,000 * 8%) = $540,000

Future payments = ($24,295 * 3 years) + $500,000 = $572,885

Now $540,000 / $572,885 we get 0.9426.

Considering PVIF table 0.9426 is the present value for 2 years when the rate is 3 %

Thus the interest rate is 3 %

Interest expense for December 31, 2021 = $540,000 * 3 % = $16,200

Interest expense for 2022 = ($540,000 + $16,200) * 3 % = $16,686