On January 1, 2018, A Corporation made a loan to B Corporation. The note documen
ID: 2554851 • Letter: O
Question
On January 1, 2018, A Corporation made a loan to B Corporation. The note documenting this loan agreement is a zero-interest bearing note. The terms of the note require B to pay A $30,000 on January 1, 2020. The market (effective) rate of interest for the level of risk in this situation is 6%. 2. Prepare a discount amortization schedule and show how the not will be reported in the balance sheet as of Dec. 31,2018 and Dec. 31, 2019.
What effect does the note have on the income statement for the years ending December 31, 2018, December 31, 2019 and December 31, 2020?
Explanation / Answer
Solution:
maturity value of note = $30,000
Effective rate of interest = 6%
Maturity period = 2 years
Discounted value of note = $30,000 / (1+0.06)^2 = $26,700
Discount on note = $30000 - $26,700 = $3,300
Effect on income statement:
December 31, 2018 - Recognition of interest expense = $1,602
December 31, 2019 - Recognition of interest expense = $1,698
December 31, 2020 - No effect on income statement
Discount amortization schedule - Note Date Interest Expense Discount amortized Carrying value of note 1-Jan-18 $26,700.00 1-Jan-19 $1,602.00 $1,602.00 $28,302.00 1-Jan-20 $1,698.00 $1,698.00 $30,000.00