On January 1, 2010, Jacobs Company sold the property to Dains Company which originally cost Jacobs $760,000. There was no established exchange price for this property. Dains gave Jacobs a $1,200,000 zero-interest-bearing note payable in three equal annual instalments of $400,000, with the first payment due December 31, 2010. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,200,000 note payable in three equal annual instalments of $400,000 at a 10% rate of interest is $994,800. What is the amount of interest income that should be recognized by Jacobs in 2010, using the effective-interest method? a. $0. b. $40,000. c. $99,480. d. $120,000.
On January 1, 2010, Jacobs Company sold the property to Dains Company which originally cost Jacobs $760,000. There was no established exchange price for this property. Dains gave Jacobs a $1,200,000 zero-interest-bearing note payable in three equal annual instalments of $400,000, with the first payment due December 31, 2010. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $1,200,000 note payable in three equal annual instalments of $400,000 at a 10% rate of interest is $994,800. What is the amount of interest income that should be recognized by Jacobs in 2010, using the effective-interest method? a. $0. b. $40,000. c. $99,480. d. $120,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On January 1, 2010, Jacobs Company sold the property to
Dains Company which originally cost Jacobs $760,000. There
was no established exchange price for this property. Dains
gave Jacobs a $1,200,000 zero-interest-bearing note payable in
three equal annual instalments of $400,000, with the first
payment due December 31, 2010. The note has no ready
market. The prevailing rate of interest for a note of this type is
10%. The present value of a $1,200,000 note payable in three
equal annual instalments of $400,000 at a 10% rate of interest
is $994,800.
What is the amount of interest income that should be
recognized by Jacobs in 2010, using the effective-interest
method?
a. $0.
b. $40,000.
c. $99,480.
d. $120,000.
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