Question

On September 30, 2018, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2020. An interest rate of 8% reflects the time value of money for this type of loan agreement.
What amount of interest expense, if any, would Corso record on December 31, 2019, the company’s fiscal year end?
a. $68,687.
b. $80,000.
c. $60,000.
d. $69,959.

Answer 1

Answer: $69,959

Explanation:

The amount of interest expense, that Corso will record on December 31, 2019, the company’s fiscal year end will be calculated thus:

First, we calculate the present value of payment which will be made on September 30,2020 and this will be:

= $1000000 × 0.857339

= $857339

Then, the interest expense on December 31,2018 will be:

= $857339 × 8%/12 × 3

= $17147

Therefore, the Interest expense on December 31,2019 will be:

= ($857339 + $17147) × 8%

= $874486 × 0.08

= $69959