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On January 1, 2020, Brock Co. exchanged equipment for a $100,000 zero-interest-bearing note due on January...

On January 1, 2020, Brock Co. exchanged equipment for a $100,000 zero-interest-bearing note due on January 1, 2023. The prevailing rate of interest for a note of this type at January 1, 2020 was 8%. The present value of $1 at 8% for three periods is 0.79383. What amount of interest revenue (rounded to the nearest dollar) should be included in Brock’s December 31, 2020 income statement ________?

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Answer #1

$6,351 is the correct answer.

Explanation:

As the company has exchanged the equipment for $100,000 zero-interest-bearing note due after 3 years.

Therefore, sales will be recorded by an amount = Principal amount of zero-interest-bearing note * The present value of $1 at 8% for three periods

Therefore, sales = $100,000 * 0.79383 = $79,383

Now the company will record the interest income every on the sum of net present value of sale and interest accrued.

Hence, interest revenue should be included in Brock’s December 31, 2020 income statement = Present value of Note * Interest Rate * 12 months/12 months

= $79,383 * 8% = $6,351

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