Question

On January 1, 2020, Woodall Enterprises sold property to Mattson Company which originally cost Woodall $1,470,000. Mattson gave Woodall a $2,100,000 zero-interest-bearing note payable in three equal annual installments of $700,000, with the first payment due December 31, 2020. The prevailing rate of interest for a note of this type is 10%. The present value of a $2,100,000 note payable in three equal annual installments of $700,000 at a 10% rate of interest is $1,740,900. What is the amount of interest income that should be recognized by Woodall in 2020, using the effective-interest method

Answer 1

Based on the present value of the notes payable and the interest, the amount that should be recognized as interest income should be $174,090.

Interest income

When using the effective interest method, the interest income can be calculated as:

= Present value of note x Interest rate

Solving gives:

= 1,740,900 x 10%

= $174,090

In conclusion, the interest income is $174,090.

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