Question

Baker Inc. acquired equipment from the manufacturer on 10/1/2018 and gave a noninterest-bearing note in exchange. Baker is obligated to pay $918,000 on 4/1/2019 to satisfy the obligation in full. If Baker accrued interest of $9,000 on the note in its 2018 year-end financial statements, what is its imputed annual interest rate?

Answer 1

Answer:

4%

Explanation:

Interest included in $918000 is for six months from 10/1/18 to 4/1/12.

Interest for first three month period from 10/1/18 to 31/12/18 = $9000.

This implies that :

Interest from 1/1/19 to 4/1/19 = $9000.

Principal amount excluding interest due:

= Baker's obligation amount - Accrued interest - Accrued interest

= $918,000 - $9,000 - $9,000

= $900,000

Interest rate:

= [($9,000 × 12/3) ÷ 900000] × 100

= 4%