Question

On January 1, 2020, Swifty Corporation exchanged equipment for a $640000 zero-interest-bearing note due on January 1, 2023. The prevailing rate of interest for a note of this type at January 1, 2020 was 12%. The present value of $1 at 12% for three periods is 0.71. What amount of interest revenue should be included in Swifty's 2021 income statement

Answer 1

Answer:

$61,071.36

Explanation:

According to the scenario, computation of the given data are as follows,

Value of note = $640,000

So, Carrying value of note on Jan 1, 2020 = $640,000 × 0.71

= $454,400

Prevailing interest rate = 12%

So, Interest for 2020 = $454,400 × 12% = $54,528  

Now, Interest revenue for 2021 = ($454,400 + $54,528) × 12%

= $508,928 × 12%

= $61,071.36

Hence, the amount of interest revenue that should be included in Swifty's 2021 income statement is $61,071.36