[jessanqi]

Hi, Just would like to confirm, no interest recognized when note exchange for only cash??

Thank you!! 🙂

On January 1, 20X4, Derby Corporation loaned $20,000 to Elliot Company. The promissory note made by Elliot did not bear interest and was due on December 31, 20X5. No other rights or privileges were exchanged. The prevailing interest for a loan of this type was 12%. The present value of $1 for two periods at 12% is 0.797. Derby should recognize interest income in 20X4 of

A. $0
B. $1,913
C. $2,030
D. $2,400

Explanation
The correct answer is A. ASC 835-30-25-4 – Interest, states that when a note is received or issued solely for cash and no other rights or privileges are exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged. Hence, the note is recorded at the face amount of $20,000, and no interest would be recognized by Derby in either 20X4 or 20X5. Had this note been issued in exchange for property, goods, or services, Derby would have recorded the note at its discounted present value of $15,940 ($20,000 x 0.797) and would have reflected interest income of $1,913 during 20X4 ($15,940 x 12%).