On Jan 1, 2014 Gravel Company lent $17,800 cash to Paver Company. The promissory

Question

On Jan 1, 2014 Gravel Company lent $17,800 cash to Paver Company. The promissory note made by Paver for $20,000 did not bear explicit interest and was due in Dec 31,2016. No other rights or privileges were exchanged. The prevailing interest rate for a loan of this type is six percent. Assume that the present value of $1 for two periods at six percent is .89, Paver should recognize interest expense in 2014 of

A) 0 B) $1,068 C) $1,100 D) $1,200 On Jan 1, 2014 Gravel Company lent $17,800 cash to Paver Company. The promissory note made by Paver for $20,000 did not bear explicit interest and was due in Dec 31,2016. No other rights or privileges were exchanged. The prevailing interest rate for a loan of this type is six percent. Assume that the present value of $1 for two periods at six percent is .89, Paver should recognize interest expense in 2014 of

A) 0 B) $1,068 C) $1,100 D) $1,200
A) 0 B) $1,068 C) $1,100 D) $1,200

Explanation / Answer

Initial Loan Value                17,800 Promissory Note                20,000 Interest rate 6% PV of promissory note at Y1= 20000/(1+6%) PV of promissory note at Y1=                18,868 Interest for year 1= 18,868-17,800 Interest for year 1=                  1,068 So option B is correct

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