On January 1, 2017, Crown Company sold property to Leary Company. There was no e
ID: 2339355 • Letter: O
Question
On January 1, 2017, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $4,000,000 zero-interest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2017. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,884,000 at January 1, 2017. Assuming that Leary has a calendar year end fiscal year, how much interest expense should Leary Company report for the year ended December 31, 2018 related to this note?
Explanation / Answer
Present value of Bonds on Jan1 2017 2884000 Add: Interest for Dec 31 2017 259560 (2884000*9%) Total amount 3143560 Lless: Amount paid on Dec31 2017 800000 Amount outstanding on Jan1 2018 2343560 Interest expense for 2018 (2343560*9%) 210920.4