[Lighthaven]

On December 1, Year 1, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, Year 2. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. What amount of accrued interest receivable should Tigg include in its December 31, Year 1, balance sheet?

a. $0

b. $4,450

c. $2,166

d. $2,000

Explanation

Choice “d” is correct. $2,000 accrued interest receivable in December 31, Year 1 balance sheet.

200,000 x 12% x 1/12 = 2,000

While the calculation based on proceeds received of $194,000 (194,000 x 13.4% x 1/12) equals interest earned of $2,166, only $2,000 is a receivable, since the $166 difference is amortization of deferred interest income.

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I saw the answer to this on another forum post but I still don’t understand what the amortization of deferred interest income means. Why is it deferred? Thanks!

AUD - 83
REG - 81 (2x)
FAR - 78
BEC - 85

And that's all she wrote.