Becker...FAR. ch.4-Working Capital and Fixed Assets
My question is, if there is no interest, why do we record interest income in year one? Doesn't non-interest bearing note mean there is no interest on this note? I am just really confused.
On January 2, Year 1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 non-interest bearing note due January 2, Year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, Year 1, was 10%. The present value of 1 at 10% for three periods is 0.75.
In Emme's Year 1 income statement, what amount should be reported as interest income?
Rule: A non-interest bearing note should be recorded at its present value calculated using the prevailing market interest rate. The market interest rate is then used to calculate interest on the note.
Choice "c" is correct. $45,000 interest income for Year 1.