Beat The Trojans Inc. (BTT) buys a three-year, $100,000 certificate of deposit f
ID: 2427305 • Letter: B
Question
Beat The Trojans Inc. (BTT) buys a three-year, $100,000 certificate of deposit from Busy Bank on 1/1/2016. The CD has a variable rate: BTT will earn 5% interest in 2016, 6% interest in 2017, and 7% in 2018. If BTT redeems (cashes in) the CD before 12/31/2018, BTT will receive a payout reflecting only 4.5% annual interest over the entire holding period, penalizing BTT for early redemption by paying lower interest than originally promised. (This is a valid contract clause.) Busy management estimates a 5% probability that BTT will redeem the CD. How should Busy account for and disclose its obligations from the CD in its 12/31/2016 financial reports? Assume that BTT still holds the CD as of this date.
Explanation / Answer
Busy Accounts CD Based on accrual basis Interest Deposits 01-01-16 100000 5000 = 100000 x 5%