Answer:
1. Determine the rate used to discount the noninterest-bearing note.
face value of the notes receivable = $400,000 + $260,000 + $200,000 = $860,000
carrying value = $855,000
difference = $860,000 - $855,000 = $5,000
6 month note, so total interest = $10,000
yearly interest = $10,000 x 2 = $20,000
interest rate = $20,000 / $200,000 = 10%
2. Determine the explicit interest rate on Note 2. (Round your intermediate calculations to the nearest whole dollar amount.)
total accrued interest = $22,500
interest on note 1 = $16,000
interest on note 2 = $6,500 (six months worth of interest)
total yearly interest = $13,000
interest rate = $13,000 / $260,000 = 5%
3. What is the amount of interest revenue that appears in the company’s 2021 income statement related to these notes?
total interest = $22,500 + $5,000 = $27,500
