Question

On January 1, 2014, Ball Co. exchanged equipment for a $500,000 zero-interest-bearing note due on January 1, 2017. The prevailing rate of interest for a note of this type at January 1, 2014 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Ball's 2015 income statement? A. $50,000 B. $0 C. $41,250 D. $37,500

Answer 1

Answer:

The correct answer is C $41,250

Explanation:

For computing the interest revenue, first we have to calculate the present value and than compute the interest amount for both the years 2014 and 2015.

So,

Present value of notes = $500,000 × 0.75

                                      = $375,000

Now, compute the interest earned for both the years

For 2014 = $375,000 × 10%

               = $37,500

For 2015 =$37,500) × 10%

              = $3750

So for 2015 = $37,500 + $3750 = $41,250

Hence, $41,250 of interest revenue should be included in Ball's 2015 income statement

Thus, the correct answer is $41,250