7. On January 1, 2016, Aaron Hotchner loaned $5,795,518 to Stephen Walker Compan

Question

7. On January 1, 2016, Aaron Hotchner loaned $5,795,518 to Stephen Walker Company. A zero-interest- bearing note (face amount, S18 million) was exchanged solely for cash The note is to be repaid on December 31, 2025 a. What is the effective interest rate on this note? b. Assuming a December 31, 2016 year-end, what is the amount of interest expense to be shown on the income statement of Stephen Walker Company? c. Show how this note would be reported on Stephen Walker Company's December 31,2016 Balance Sheet.

Explanation / Answer

Requirement a) Effective Interest rate on this note is 12% arrived by calculation given below Steps to find effective interest rate Divide 5795518 by 18000000 to get 0.32197 Look for this value in PVIF table at 10 years to find effective interest rate Present value interest factor of (5795518/18000000) at 10 years with 12% Interest in PVIF table is 0.321973222 OR Divide 18000000 by 5795518 to get 3.10585 Look for this value in PVIF table at 10 years to find effective interest rate Future Value interest factor of (18000000/5795518) at 10 years with 12% Interest in FVIF table is 3.105848347 Requirement b) Interest expense to be shown on the income statement(December 31, 2016) of Stephen Walker Company is =5795518*12% 695462.16 Requirement c) Note would be reported in Stephen Walker Company's December 31, 2016 Balance Sheet as follows Liabilities Non-current Liabilities Zero-Interest bearing Note payable 5795518 Add : Interest accumulated on the above note 695462.16 6490980.16

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