Question

Lester Company received a seven-year zero-interest-bearing note on February 22, 2020, in exchange for property it sold to Porter Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 6% on February 22, 2020, 6.5% on December 31, 2020, 6.7% on February 22, 2021, and 7% on December 31, 2021. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2020 and 2021, respectively?

Answer 1

Answer:

6.42% and 7.37%

Explanation:

This can be worked out as follows:

Year                   Rate of         Outstanding portion    The weighted

                          Interest          of the year                     Rate

22/02/2020   6.0 %             * 2/12                                     1.0 %

31/12/2020     6.5%               * 10/12                                   5.42%

                           Total                                                       6.42%

22/02/2021    6.7%               *2/12                                       1.12%

31 /12 / 2021    7.5 %              *10/12                                     6.25%

                              Total                                                       7.37%

Thus, the interest rates applicable in the calculation of interest revenue in light of this transaction for the years ended December 31, 2020 and 2021,  are 6.42% and 7.37% respectively?