Question

On September 30, 2018, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2020. An interest rate of 8% reflects the time value of money for this type of loan agreement.

What amount of interest expense, if any, would Corso record on December 31, 2019, the company's fiscal year end?

Answer 1

Acquisition cost of $1,000,000 is paid immediately

Remaining is paid after 2 years on September 30, 2020 = $1,000,000

Acquisition cost of patent = $2,000,000.

We have to calculate present value of $1,000,000 @8%, 2 years.

Present value factor is 0.8573.

Present value of $1,000,000 = 1,000,000×0.8573 = $857,300.

Calculation of interest expense :

Principal amount = $857,300

Rate = 8%

Time period = 1 year

Interest expense = 857,300 x 8%

                             = $68,584

Interest expense to be recorded as on December 31, 2019 = $68,584