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. What is the carrying value of the note payable on 12/31/2021

Answer 1

Answer:

The carrying value of the note payable on 12/31/2021 is $95,260

Explanation:

First, we need to calculate the present value of note

Present value of note = Face value / ( 1 + Interest rate )^numbers of years

Where

Face value = $120,000

Interest rate = 8%

Numbers of years = 5 years

Placing vlaues in the formula

Present value of note = $120,000 / ( 1 + 8% )^5

Present value of note = $81,669.98

Present value of note = $81,670

12/31/2020

Interst expense = Present value at issuance x Interest rate = $81,670 x 8% = $6,533.60

Carrying Value = Present value at issuance + Interest for 2020 = $81,670 + $6,533.60 = $88,203.60

12/31/2021

Interst expense = Present value at issuance x Interest rate = $88,203.60 x 8% = $7,056.29

Carrying Value = Present value at issuance + Interest for 2021 = $88,203.60 + $7,056.29 = $95,259.89 = $95,260

Hence, the carrying value of the note payable on 12/31/2021 is $95,260