9 On January 1 2017 Donna Free loaned 187825 to David Denner

9. On January 1, 2017, Donna Free loaned $187,825 to David Denner. A zero-interest- bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2019. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest expense should be recognized by Mr. Denner in 2017?

Solution

Answer: Interest expense for 2017 is $18782.50 Calculation: Interest amount = 187825*10% = $      18,782.50 Note that $187825 is the PV of $250000 discounted at 10% for 3 years. Hence, 2017 (1st year) interest is 187825*10%.