Question

What is the expected result if Northern Pine Company accepts $16,750 for a zero-interest-bearing, three-year note...

What is the expected result if Northern Pine Company accepts $16,750 for a zero-interest-bearing, three-year note with a face value of $20,000?

A) Northern Pine will earn interest but has no way to determine the interest rate since it is not stated.

B) Northern Pine will have no interest revenue from this note because it is zero-interest-bearing.

C)Northern Pine must approximate the fair value of the note by comparing it to similar items.

D)Northern Pine can determine the implicit interest rate by amortizing the difference between the future value and the present value over the life of the note.

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Answer #1

Ans: Northern Pine can determine the implicit interest rate by amortizing the difference between the future value and the present value over the life of the note. (option d)

Northeren Pine can surely determine the interest rate by finding out and amortizing the difference between future and present value of the note. Hence, option D is the correct answer.

Northeren pine can earn interest as well as determine the interest rate as well . Also it will not be able to determine the approximate value by comparing similar items Hence, all other options are incorrect.

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