Question

On January 1, 2020, HD Corp. paid $60,000 and issued a 5-year noninterest bearing note payable with a face value of $120,000 in exchange for a piece of equipment. The applicable interest rate is 8%. HD Corp depreciates over a straight-line basis and utilizes the effective interest method to record interest expense. The equipment is expected to be in service for 8-years at which point it will be worthless.
Required:
What is the carrying value of the note payable on 12/31/2021?

a. $120,000
b. $88,204
c. $75.136
d. $95.260
e. $89,335

Answer 1

Answer:

b. $88,204

Explanation:

The computation of the carrying value of the note payable is shown below:

= Present value of the notes + interest

= $120,000 × 0.680583 + ($120,000 × 0.680583 × 8%)

= $81,670 + $6,534

= $88,204

hence, the second option is correct