Question

On September 30, 2018, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2020. An interest rate of 8% reflects the time value of money for this type of loan agreement. What amount of interest expense, if any, would Corso record on December 31, 2019, the company's fiscal year end? I have the answer for the interest expense as of 12/31/19. What would the expense be on 12/31/18 and 12/31/20?

Answer 1

Cost of patent acquired on September 30, 2018 = $2,000,000

Payment made on September 30, 2018 = $1,000,000

Balance amount to be paid on September 30, 2020 = $1,000,000

Present value of $1,000,000 to be paid on September 30, 2020 = $1,000,000 x Present value factor (8%, 2)

= 1,000,000 x 0.8573

= $857,300

For the year 2018, interest will be charged for 3 months from September 30 to December 31

Interest expense on 12/31/2018 = 857,300 x 8% x 3/12

= $17,146

For the year 2020, interest will be charged for 9 months from January 1 to September 30

Interest expense on 12/31/2020 = 857,300 x 8% x 9/12

= $51,438

Kindly comment if you need further assistance. Thanks